The world economy is entering a new phase after the failure of fiscal stimulus to create a sustained recovery in either the US or Europe. In the US, consumers have retrenched, housing starts have crashed and a double-dip recession is possible. In Europe, fiscal retrenchment is underway after intense market pressures. A new approach to recovery is needed.
The striking feature in the current debate about austerity and stimulus has been the lack of attention to investment. Consumers will not provide the engine of recovery, nor should they after overspending for a decade. Instead, the US and Europe should be using the recent corrective boost in saving rates to promote long-term investments in physical and human capital as the proper way back to sustained growth.
Despite the evident need for a rise in national saving after 2008, President Barack Obama tried to prolong the consumption binge by aggressively promoting home and car sales to already exhausted consumers, and by cutting taxes despite an unsustainable budget deficit. The approach has been hyper short term, driven by America's two-year election cycle. It has stalled because US consumers are taking a longer-term view than the politicians.
By contrast, the administration's interest in boosting investment has been haphazard. Obama has shown a strange inability to articulate an operational and forward-looking policy framework in signature areas such as healthcare, energy, climate change, and long-term fiscal policy. At a time when China is building hundreds of miles of subway lines, tens of thousands of miles of highways, a couple of dozen nuclear power plants, and a network of tens of thousands of miles of high-speed intercity rail lines, the US struggles to launch a single substantial project. China saves and invests; the US talks, consumes, borrows, and talks some more.
It is wrong in this context to believe that the only choice is further fiscal stimulus versus a repeat of the Great Depression. Further short-term tax cuts or transfers on top of America's $1,500bn budget deficit are unlikely to do much to boost demand, while they would greatly increase anxieties over future fiscal retrenchment. Households are hunkering down, and many will regard an added transfer payment as a temporary windfall that is best used to pay down debt, not boost spending.
Businesses, for their part, are distressed by the lack of direction. The US Chamber of Commerce was not simply lobbying when its director of government affairs recently declared to the Financial Times that: "When businesses try to plan out what their tax liabilities will be next year, or game out credit availability or the investment climate, they just don't know what it will look like. Uncertainty is a real killer."
A proper US investment recovery plan has five parts. The first is a significant boost in investments in clean energy and an upgraded national power grid. These should be promoted through guaranteed price subsidies to clean energy to be financed by gradually rising carbon taxes, as the clean energy capacity comes on line during the coming decade. The alternative cap and trade system is cumbersome, unnecessary and politically dead.
The second is a decade-long program of infrastructure renovation, with projects such as high-speed inter-city rail, water and waste treatment facilities and highway upgrading, co-financed by the federal government, local governments and private capital. Such projects are complex, requiring government leadership in land management, project design, public-private co-operation and partial subsidy or credit guarantees. New tools can help, such as a national infrastructure bank -- championed last year before plans were strangely downplayed.
The third component is more education spending at secondary, vocation and bachelor-degree levels, to recognize the reality that tens of millions of American workers lack the advanced skills needed to achieve full employment at the salaries that the workers expect. The unemployment crisis is largely a structural crisis of job skills. It is hitting young workers -- many of whom should still be learning -- and older workers who lack a degree.
The penultimate part of the plan is boosting infrastructure exports to Africa and other low-income countries. China is running circles around the US and Europe in promoting such exports of infrastructure. The costs are modest -- essentially just credit guarantees -- but the benefits are huge, in increased exports, support for African development and a boost in geopolitical goodwill and stability.
The fifth and final element should be a medium-term fiscal framework that will credibly reduce the federal budget deficit to sustainable levels within five years. This can be achieved partly by cutting defense spending by two percentage points of gross domestic product, meaning ending the Iraq and Afghanistan occupations and cutting wasteful weapons systems. Other measures should include gradually phasing out the tax subsidy on high-end health insurance, taxing Wall Street bank profits and bonuses, raising high-end marginal tax rates and, if necessary, introducing a small value added tax. Public investment costs could be financed mainly by public tolls, gradually rising carbon taxes and by repayments of international loans to finance the export of infrastructure.
The Obama administration and Republican opposition are both guilty of irresponsible short-termism and lack of forward-thinking. Both would dangerously prolong the budget deficit, the first through a combination of increased fiscal transfers and tax cuts, and the latter through even larger and more unsustainable tax cuts. Neither would do what America needs and China is doing better: investing for the future through serious attention to sustainable energy, cutting-edge infrastructure, enhanced labor-force skills and the promotion of international development through the export of infrastructure.
The author is director of The Earth Institute at Columbia University.
This article originally appeared in The Financial Times.
Follow Jeffrey Sachs on Twitter: www.twitter.com/jeffdsachs
China "invests" more in infrastructure for a couple of reasons:
1) They had little to begin with
2) The Chinese goverment holds controlling financial interests in most of their industrial base, gleaning substantial profits for the government,as opposed to the citizens.
Rather than divest itself of nationalized industries, the ChiComs suck wealth out of the economy, keeping their citizens oppressed while lining the pockets of the ruling class and their select industrial inner circles (sounds like crony-capitalism, does it not?).
And the author is correct, temporary tax cuts, by their nature, do nothing to encourage investment.
To expect the US to debt-fund another spending binge is to be oblivious to the financial pit we are in.
What to do?
1) Cut MARGINAL tax rates; keep investment tax rates low
2) Reduce the size and scope of the Federal government; pass a constitutional amendment capping annual Federal expenditures at 19% of GDP
3) Subject all entitlements & spending to "paygo" rules
4) Stop the incessant anti-business policies and rhetoric eminating from DC,
By some estimates, US businesses are sitting on $2T of cash, scared to invest it do to uncertainty about DC tax and regulatory policies.
We must create an inviting investment environment for the world, to shore up the economy and get unemployment back down to historic levels
Isn't this a "long term" investment? Green Collar jobs are the fastest growing segment of our economy. Already Wind Turbine jobs outnumber coal mining jobs.
While your proposal makes a lot of sense, I wonder if you took a rhetorical shortcut to make your piece of writing more dramatic. I would have hoped that you at least *mention* the forward thinking and visionary investment in our future green tech economy, but unfortunately I don't see it anywhere.
Can you provide a source for.... "Already Wind Turbine jobs outnumber coal mining jobs". Don't forget to include stats on interdependent jobs such as rail transportation (of coal), equipment manufacture and maintenance (steel workers), employment in coal-fired electric generation, local service jobs, etc.
**I'm not arguing that wind energy is more "sustainable" than coal. But, for the same reason, major employment in the wind turbine industry is not very "sustainable" beyond manufacture, installation and (hopefully minimal) maintenance of wind turbines.
Just saying it's a fantasy that "green jobs" are the answer to our employment woes.
While the coal industry overall provides double the number of jobs as wind, it is important to note, as A. Siegel does at Get Energy Smart NOW!, that coal accounts for about 50% of our energy output and wind currently makes up 2% of our energy output.
quick seach on the net resulted in the above. Coal, counting rail and such is still double.
But wind could catch up. The number of jobs in wind is construction related. It takes far fewer to maintain the wind farm once complete.
But I say Wind, baby, Wind! Wherever we can put them up. It might take 20 years to make it to 30 percent of our needs with an all out building program, but if we also start now on a hundred or so nuke plants, coal might be reduced from 50 to 15 percent. not good for the miners and rail, but hey, barrel makers and wagon wheel makers had to find new work too.
I am not interested in a tit-for-tat here. The bottom line is that the future is in green tech, and that is a smart place to invest. Therefore it was smart of the Recovery Act to make such an historic investment in this sector of our economy. Don't worry, the oil coal and gas industries got their (usual) billions of dollars in subsidies as well.
For the benefit of our less-educated classes, who take it all so seriously, I'll explain the tail-wagging-a-dog analogy. You see: the "dog" is actually the "Government" and the "tail" is actually the "Corporation". The Corporation is wagging the Government; get it? Never mind; just laugh along with the laugh track. Take a blue pill. It's almost Intermission, anyway. They have Intermissions every 200 years or so and the next one is about due any time now. Let's just hope the audience doesn't get as rowdy during the Intermission as they have in the past.
The next intermission will be the rowdiest ever, with more than two factions.
That is of course if we have one.
Surely some creative genius could produce a spin-off of the original show designed to better appease the refined tastes of generational aristocracy. A newly remodeled and up-scale "Alcatraz Theater of the Performing Arts" would be an ideal venue to stage such plays. Act II of "The Kabuki Government" could introduce pernicious new threats to Global Harmony wherein the masses become re-educated to appreciate harmonization. Ticket prices would, of course, remain exorbitant due to audience size; but they're accustomed to that. That's is the price of exclusivity, after all. They could still sip out of those little imported flasks but it would have to be Government-regulated KoolAid; for security reasons.
But not the US gov.
Makes sense when you think about it.
(1) Cut the Military Industrial budget in half tomorrow, then by a further 50% next year, and 50% againthe year after, until it is down to what it takes to defend the USA from an attack on it's own territory. The USA can no longer afford to garrison the world militarily. It is sucking the country dry.
(2) All income, no matter the source should be taxed the same as a working man's wages. That means income form every source. if you rich uncle dies and leaves you a billion then it should be taxed as your personal income. If it is income tax it. Profit, salary, bonus, inheritance? Tax it equally. that is a progressive tax, the more you earn the higher the tax rate. with a top rate of 100% over a certain amount. Then spend the money on building the USA, not trying to make other countries bend to your will and only be able to approach you on bended knee.
Forget about Empire, it is already dead in the water. Build the USA at home. Rebuild the seriously neglected country that is the USA. Get off the Military and Empire addictions.
Cut HHS department by 50 percent.
http://www.usgovernmentspending.com/numbers#usgs302
http://www.usgovernmentspending.com/budget_pie_gs.php?span=usgs302&year=2009&view=1&expand=&expandC=&units=b&fy=fy11&local=undefined&state=US#usgs302
When you tax incomes and investment, guess what goes down.
A "tax it all and let God sort'em out" approach is not productive economically, or for revenue enhancement purposes. Tax policiy that supports expanding GDP (making the pie bigger as it were) is the way to go.
A flat tax approach (reduce rates, broaden the base) while eliminating all deductions not necessary for determining income (all the schedule A items), tax health insurance as income, keep cap gains taxes at 15% and elimination of business income taxes (consumers end up paying them anyways) would bring back the US economy in no time.
a proper US investment recovery plan really has only one part... stop listening to dipsticks like jeffrey sachs. investment does not equal productivity. you're running our of OPM jeff... and that day is rapidly approach... then things will get real interesting.
Note that businesses do not employ people unless there is a buyer for their goods and right now, there are few buyers for heir goods.
BTW the ideas yo appear to like have been proven FAILURES.
thx you've proved my point. and when they're wrong, we'll get a refund... no? OPM OPM OPM...
fairtax.org
You want a great example of how a government program works? Washington, DC is strangled by traffic. Metro, the subway system paid for by taxpayers across the nation has a monopoly on mass transit and it's success is desperately important. Yet, do you think they can charge the fares they need to in order to even maintain, let alone expand the system? Of course not - if they do people just rebel and return to their cars (than goodness there isn't a government monopoly to prevent that). The system is a cacophony of mismanagement with gargantuan failures of things as simple as the escalator system on a routine basis, so that commuters have to climb as many as 200 stairs in 100 degree heat to get out of the stations. So people are abandoning it in droves, finances are worsening, yada, yada....
Stand by for health care, run by the sorts of government geniuses we have running Metro in our nation's capital and the surrounding suburbs.
The real problem is the huge, costly war machine the US has so it can be the emperor of the world.
BTW it has been proven repeatedly that the best fare to charge for transit is minimal (free just causes vandalism costs to increase). The rest of the operating costs should come from the common good (AKA taxes).
Underfunding transit is foolish in the long run, but that is a uniquely American trait. Penny wise and pound (dollar) foolish
BTW - we already have very efficient and low cost government run health care called Medicare and the VA and the Military health care systems. Not only that but the single payer government run health care systems around the world are ALL cheaper and more efficient than the private system in the US, that is why Americans pay over twice as much for health care as the rest of the world.
And a lot of things in the Defense budget benefit society as a whole. That GPS you use to get to gramma's house? Everything about it, except the RECEIVER you bought, is paid for by the Defense Budget. Its a wickedly expensive program.
they are subsidized, or else they would go out of business. same thing with city buses in most cities, the true fare is double, but the city uses general tax revenue to keep the fare low. Let the bus make a profit, it might give better service.
Individual transportation is extremely wasteful and inefficient and over time will become too costly both to the individual and society.
Study after study shows that if common transportation has to make a profit, it will not, because there will NOT be enough people using the service. All cost/usage analysis shows that maximum usage NEVER recovers costs and that what the user pays directly effects how much usage there is.
The goal of common transport is NOT to make money but to provide the infrastructure so people can participate in the economy. We should be pricing common transportation to MAXIMIZE USAGE, Not minimize the non-fare cost recover.
This is a fine example where the bean-counter mentality directly conflicts with what is best for society because the bean-counters fail to account for ALL the costs and benefits because some are intangible.
China does have a centralized government, but it also has a huge (and rapidly growing ) merchant class (that is, a middle class).
The fact China is growing at a 10% rate even after the government has put the brakes on, while the US is near negative growth does lot to say that centralized government that is focused on the future for its citizens, is a whole lot better than one that lets a greedy super rich minority set the agenda.
Who si going to be better off in a few years?
It probably will not be Americans unless we slam the super rich with huge taxes and we cut the military by 75%.
We (the people) need to stop falling for and into the class-warfare that is being fomented BY the super-rich WITHIN our government to distract us from the fact that they're really just pulling the ladder up after themselves to create a culture of dependence.
Personally, I don't want the government "planning" our future. Dependence is SLAVERY all over again.
No -- it's stalled because US consumers are broke and out of work. Their long term view stretches all the way to their next mortgage payment and, in some cases, all the way to their next meal. The situation is desperate and the GOP's plan to make it worse in order to regain political power is indecent.
Unfortunately, the global warming issue has steered this administration into the ditch. Global warming is mostly about world redistribution of wealth, not that the earth is actually warming. We have become caught up in the wake of this bizarre social reorganization wish list and ignorant politicians, incapable of critical thought, fail to see what is happening.
If this green market is so valuable, viable and profitable, it would not need government intervention - for governments are not adept at picking winners.
Like it or not, coal gas and nuclear are here to stay - in a few short years, the global warming scare will be over, and we can get back to work. Let the american people unleash their creativity and see where it takes us - but let us do it on our own dime, it is the most efficient and least expensive method - as time has proven.
In time, the only viable energy source will be "green" energy, but if we wait for the market to develop we will be out of luck, because by the time green is cheaper than other forms, we will not have the 10 to 20 years needed for the infrastructure conversion.
To ensure that the US will be able to continue to thrive economically, the US MUST do exactly the same as China, artificially inflate the cost of oil/gas-based energy NOW so the conversion will take place in a timely manner. That way when the real cost of oil/gas-based energy gets to the artificial cost, we will have already converted.
Basically we need to undo over 150 years of oil infrastructure in less than 15 years. We should have listened to Jimmy Carter 40 years ago and artificiality inflated the oil-based energy costs then so we would already be done with the conversion. Europe sort of listened and they are in much better shape than the US.
If the price of oil spikes tomorrow, we are all completely screwed and those that can't walk to a farm to get their food will get might hungry.
The free market only works when everything is perfect and there is lots of time, we have neither.
The free market works 24-7-365 in every Americans life
China is commissioning a coal fired power plant every week, for a reason, coal is dirt cheap.
The green tech industry was the last to be hit by our recession, and the first to recover. That should tell you that the demand and incentive is already there. The Recovery Act made an historic investment in these industries, and has led to the creation of private sector jobs in the fastest growing part of our economy.
I think the difference here is really one of values - while you may be content to sit back and let "the market" be the sole dictator of industry, I think that puts too much trust in what is basically an *a-moral* force. Markets don't need to think about everyone else's benefits, they only need to think about their own.
To say that markets by definition need to work for the common good in order to preserve their own customers is basically a philosophical argument - and its one that has unfortunately been disproven by recent history: where did "the market" in all its wisdom lead out country with their tax cuts and lax regulations in the last decade? Why, those very market forces you have so much faith in led us to offshore tax shelters and outsourced jobs overseas!
green tech can only be called fastest growing because it is sooooooo small to begin with. So that if power from wind was 1.5 percent and is now 2.0 percent of total, the rate of growth is fast. but still very small market.
150 million to a solar panel company, they are barely hanging on, and are not hiring. Green market will need much more HELP from gov to compete.
demand for energy in the last decade led to highest oil price in history, despite increased drilling in the US. Which by the why is when drilling here is profitable, when price is high.
the historic investment of which you speak was not even 5 percent of stimulus, coming in under 8 billion in loans. http://www.washingtonpost.com/wp-dyn/content/graphic/2009/02/01/GR2009020100154.html
you have to look hard in the chart to find it.
Royal Dutch Shell building a 1 billion dollar wind farm in TX.
the gov stimulus put 17 billion toward electric transmission line upgrade.
For maintaining growth while not increasing debt, I think the Federal Reserve is missing a tremendous opportunity for quantitive easing. From a starting point of $15 Trillion in decreased asset valuations, the Fed can print a lot of money before inflation kicks in. If this money ends up in the hands of people who have to spend it to stay afloat, then the economy will flourish.
Regarding taxes, I hope we're coming to grips as a nation with the hazards of wealth concentration. It is evident both in the collapse of the economy and the tabloids. I'm not a VAT fan, so I think really high marginal rates on individuals with extavagant incomes is appropriate. Someone may collect an income of $500,000,000., but they didn't earn it. Rather, they stole it from a combination of their customers, employees and shareholders. The entire Federal debt could be paid off today by our wealthiest individuals, and they would still retain more wealth than most of us could possibly imagine. Shame on them for not being patriotic enough to do so.
One option should be to keep taxes on income high, but lower the capital gains tax to increase savings rates. This is probably not gonna lead to huge tax revenue increases, however.
There are a number of things we do need, however:
1. Bring back the tax on buying automobiles. 10% would be a good starting point.
2. Raise the gas tax to 30 cents per gallon.
3. Streamline the income tax system. That means making it so you don't need to be a Ph.D in physics to figure out your taxes.
Do not worry about the rich people. Worry about people overseas that will do your job for a fraction of what you do it for. The wage difference between the various workers of the world creates its own market dynamic.
I wish I knew of a solution but everything comes down to the same thing. Those with money (influence) will always bend politicians to structure benefits for themselves.
- Graduated income tax that taxes EVERYTHING that come into a home or business the same regardless the source. If it comes in, it gets taxed. The higher the income the higher the taxes. We should follow the bible that says those that have more, give more, it is the "Christian" thing to do. After a certain income level the tax should be as high as 85% since after a certain level all income is excess to the needs of the family or business.
- Graduated consumption taxes. that is real food (not junk food) and other basic survival stuff should be taxed at a low level. Most other good should be taxed at a medium level and "luxury" goods should be taxed at 100% level. If a person can afford an expensive gas guzzler, they can afford to pay the government for the privilege.
Both of these taxes are based on the ability to pay, whereas many other taxes are not fair because they are based on non-liquid values. For example property tax based on values that can not be realized until a sale are unfair to those that are holding the property.
No VAT. fairtax.org
this is a consumption tax that consumers pay directly. you see it, you care, you know what the gov is spending on. and best of all you get to control how much you pay buy your spending habits.
and fairtax abolishes the 16th ammendment, income tax.
Oh, and let's not forget that under his watch we've pumped $40 billion into the Highway Trust Fund since we refuse to raise the gas tax.
These projects require a ton of planning and implementation before a shovel hits the ground. The money Obama allocated is a huge amount because it is specifically for these development costs, not for the actual capital budget of the projects. There's no way he doesn't fund the capital cost of the most mature HSR projects once they reach a stage of being ready for project financing. My guess is that the Florida and Cali projects will become real and then the rest of the nationwide HSR network will follow suit.
If other parts of the world want to kill each other, so be it. It is long past time for the US to just stand back and watch the carnage on our big screen TVs. We can't stop it, so why waste our time and wealth even trying
I don't know if that would cover it all, but it would definitely be a start.
But the US will likely be back on that same fool's gold path by then, just as Obama committed the Democrats to deep water drilling just months before the current disaster. So it might happen here first.
Light water reactors like the US and the Soviet union build are inherently unsafe, that is why other designs have been developed.