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 crises, we need to abandon short-term thinking in favor 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 spending increases.
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 program. 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 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 post-secondary education.
Third, governments must of course also ensure social safety nets: income support for the poor, universal access to basic health care and education, a scaling up of job training programs and promotion of higher education.
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 infrastructure.
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.
This article originally appeared in the Financial Times
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Businesses selling in the US that do not provide a certain ratio of employment in the US should pay the full tax rates on profits (30%)---and businesses that employ in the U.S. with LIVING wage jobs should receive lower tax rates. (12%). This will increase revenues and address unemployment.
To combat corporate interests in public policy, people on the left and right need to consider supporting the Fair Elections Now Act (www.fairelectionsnow.org) so that individuals are empowered in selecting and influencing leaders--not corporations.
Analysis of the budget by some groups puts military spending at around 50% of the curent budget (http://www.warresisters.org/pages/piechart.htm) The war effort in the middle east needs to transition into a development effort to lift Afhganistan out of extreme poverty.
The U.S. could partner with Afghanistan to develop its $1 Trillion mining resources with the goals of hiring contractors who will use US and Afghan workers to give Afghans much needed infrastructure AND uphold environmental, safety and labor standards.
Peacetime? Where are you living, Jeff? The US is at war around the world.
As long as this flow continues, our economy will inevitably continue to decline. That's a fact. It's a hard fact to address. I wish someone would.
http://www.business-standard.com/india/news/sumati-mehtacrisis-in-economics/393295/
What Obama owns is the method chosen to address the problem, and the fact that the method provides no solution, and no resolution, of the problem. The Japanese took this route and never recovered, and that without the tremendous outflow of capital we are now experiencing, thanks to Obama and crew. What a wonderful way to stab our future in the heart.
What did you think would happen without it? Eating dirt? Running around without clothes? What brink?
He is also praised for his work in Africa, but as you know from having read the Shock Doctrine, he was one of the architects of disaster capitalism which has been devastating for emerging countries throughout Africa.
Fanned and faved
Nobel prize winner in 1933 who adequately pointed out the consequences a war would have
economically before WW I. It was a besteseller before 1914, WW I. What happened then was
indeed acting against better knowledge. Not just once, but a second time again with WW II.
This lesson from last century is so far a lost lesson, even though the consequences are pretty
much the same. And this is therefore the relevant issue and challenge to figure out again:
http://en.wikipedia.org/wiki/Norman_Angell
Perhaps government *should* always be in a state of economic readiness for short and medium-term job expansion, - especially true as we face a coming age of energy infrastructure transition. We may be unprepared now, but the problem begs a solution: examine the short-comings of a government stripped of its capability for short-term for "shovel-ready" projects. The self-interest of government should be in sustaining broad-based employment, so why is the government so distant from the problem?
The question should be then, why is China ready for short-term job expansion and the US is not? Perhaps we need some sort of infrastructure think-tank that is constantly assessing long-term growth sustainability issues, identifying areas where private enterprise (or states for that matter) are chronically falling short addressing national infrastructure priorities (or simply will not for short-term profitability reasons). Part of that think-tank planning could be plenty of short and medium-term business activity in readiness. Funding could be varied depending on national need, and the agency itself would embrace such funding fluctuations as a normal aspect of its buisness.
Now I know its easy to rip on Washington, but there is a place for regulations and regulating takes government oversight!. Can we get over the whole "free market" thing...how about a free and well regulated market?
Please.
Because we're in a situation now where the "cousin" and "club owner / businessmen" ARE the government.
WE ARE in a post Keynesian area for decades now and I think the result is pretty clear.
Look at the work Doctor Sachs did in Bolivia, look at the good work in Russia, look at Argentina, at South Africa...Look at his partners, Summer being a good example of what is staying in the background of this totalitarianism.
The " Democratic capitalism Evangelist" preaching for Milton Friedman's fundamentalist capitalism : privatize the army, the health care, the education, the natural resources, the war, the natural disasters, the humanitarian help, sell the world and get rid of the people.
Economy as an autistic corps, left alone to private lobbies without what must regulate it because it just CANNOT have its own life, libertarian's empire without what needs to bring humans rules to a wild universe of killers : POLITICS.
Isn't it enough?
My understanding of Keynes recommendations for government spending during a crisis seem to match what the author recommends - including the caveat that government borrowing should be minimized when the economy is healthy.
During the Great Depression, government money could be effectively spent on huge public works - the effectiveness lying in creating new infrastructure (roads, dams, bridges) where none had existed before. Today, we're also facing a need for work on infrastructure - but it is to replace existing infrastructure that SHOULD have been repaired or replaced when times were good. The big win of public works doesn't seem to be there - other than not falling back into an impoverished state is a win.
Where I would take strong exception to his article is the use of "investment". That word has been POISONED by the casino-like gambling of the modern financial business. Like "industry" (another word misapplied to financial and entertainment businesses), the use has lost it's meaning. "Investment" has come to mean gambling and taking advantage of privileged position or knowledge. It has come to mean stuff like this: http://tech.slashdot.org/story/10/06/12/1341212/Quant-AI-Picks-Stocks-Better-Than-Humans?art_pos=4 where "investment" lasts at most 20 minutes.
Then he makes five proposals which sound pretty Keynesian to me. I'm not real happy with his "immediate deficit-cutting" first point: go slow; cutting back too soon negates the whole purpose of the exercise. His fourth, about the U.S. and the U.K. promoting exports, while certainly valid and maybe possible now, was not an option when the stimulus plan was enacted; the whole world was -- in my opinion; Sachs disagrees -- in dire straits, and there were simply no customers for exports. The strength of the Asian recovery makes export growth possible.
I agree with his second and third points, and hooray for the fifth! Tax the plutocrats!
While I have some disagreements with Sachs, this is not a post I would expect from a Chicago-school trickle-down Friedmanite.
"I think the first three are not "dubious" at all; I agree with them and with his subsequent arguments based on them" should be "... I agree with them and DISAGREE with ..."
1) Cyclical or created by immoral financial practices, was a stimulus package needed to regain consumer and investor confidence in the market?
2) Long term, short term, whatever the ( G multiplier > T multiplier )
Simple as that.
Just as an added note regarding some comments:
Crease: Keynesian Economics supports WORLDWIDE FREETRADE one of the most basic parts of the theory.
Sino53: Unemployment is highly complex and is a symptom of the problem. Current policies are addressing the problem and when they take effect the symptom will be corrected. No sooner and that is why unemployment is always lagging behind.
Matt Blaine: Wow Really? So reagenomics worked for you? You need to take another look at laffers curve cause I’m laughing at you lol.
I hope you are right, but I think doomsday attitudes are necessary now. In the face of massive automation, outsourcing, the end of build baby build and the end of drill baby drill (both had to end sometime) I don't see people as being as vital to the market as before. Hope I'm way off but something tells me we'd better prepare for the worst. What we are seeing is not cyclical.