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The Agenda

NRO’s domestic-policy blog, by Reihan Salam.

Jeffrey Sachs on Fiscal Stimulus



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I disagree with Jeffrey Sachs deeply and profoundly on most of the central questions facing the U.S. and the world. But as I often noted back in 2009, Sachs has offered a provocative critique of temporary fiscal stimulus from the left, i.e., Sachs favors an even higher level of government expenditures than the Obama administration as a structural matter, yet he sees temporary fiscal stimulus as a kind of unsustainable sugar rush. He has recently outlined this view in a column for The Huffington Post:

 

[T]he US economy needs more than a temporary stimulus to return to self-sustaining growth and full employment. Our growth and employment problems are structural, and need a structural response. Second, the stimulus might not actually stimulate very much even in the short term.

Obama’s economic strategy assumes that the U.S. economy has a strong natural tendency in the medium term (say three to five years) to bounce back from the 2008 recession with renewed growth. The interpretation is that demand for new homes has temporarily declined as a result of the bursting of the housing bubble and the bankruptcy of Lehman Brothers, but that private demand will quickly recover, especially if jolted by a temporary stimulus. Yet the problem in the US is deeper. The collapse of housing is actually a symptom rather than the fundamental source of US economic weakness.

The structural problem is that America has lost its international competitiveness in basic industries including textiles, apparel, and several other areas of manufacturing. The production jobs are now in China, India, and elsewhere, where wages are much lower while productivity is more or less comparable to the US (and where production often involves US companies, using US technologies, producing overseas and re-exporting to the US market). Only US college grads can resist the international competitive pressures; high-school grads have found the labor market fall out from beneath their feet.

The housing boom between 1998 and 2008 was an indirect reaction to the loss of manufacturing. As the US shed manufacturing jobs in the 1980s and 1990s, the Federal Government and Federal Reserve tried to compensate by boosting jobs in construction and other sectors shielded from international competition (so-called non-traded sectors). The Fed cut interest rates and the White House and Congress promoted housing finance, including through reckless deregulation and irresponsible behavior by government-backed entities like Fannie Mae. These efforts produced a temporary boom in housing, followed by the bust in 2008.

Obama and his advisors have believed, in effect, that they can reignite the housing boom. Rather than reacting to the underlying problem — the loss of manufacturing competitiveness — they have acted as if a bit of pump priming and the passage of time will recreate consumer-led growth in housing, autos, and other sectors.

Yet this approach has been doomed to fail, and continues to do so. 

So this first part I’ve excerpted might be described as the right-friendly part. Next comes the part that might prove more congenial to Obama critics from the left:

 

President Obama repeatedly and rightly discusses the longer-term prerequisites for restoring competitiveness: investments in infrastructure, renewable energy, job training, and quality education. Yet these alluring long-term visions are almost completely disconnected from Obama’s actual budget policies, which are relentlessly short-term and without strategies beyond a year or two. This disconnect between Obama’s soaring rhetoric and lack of long-term plans was on display in the jobs speech this week.

Obama is right that the Republican vision of relentless tax cuts, deregulation, and shrinking government is the road to ruin. Yet Obama’s alternative of short-term and shortsighted stimulus is only marginally better. Neither approach is getting America back on track.

America requires at least a decade of well-designed and well-executed national investments in people, infrastructure, and innovative technologies, in order to boost competitiveness and renovate the economy. Yet such an effort requires serious plans, careful deliberation, and higher taxation on deadbeat corporations and the super-rich. (Obama’s endorsement of lowering corporate tax rates in return for ending loopholes augers poorly once again, since it invites yet another gimmicky tax negotiation in the interests of the rich.)

There is more Republican-bashing at the end, just so no one mistakes Sachs for someone who believes that anti-stimulus conservatives are acting in good faith and on the basis of, well, an assessment not entirely dissimilar to that he sketched out at the top of his essay. Indeed, I’d argue that many conservatives support the idea of “well-designed and well-executed national investments in people [and] infrastructure,” the difference being that we see so much waste and inefficiency in public spending that we argue we can accomplish this without a substantial increase in public spending, and perhaps even with a decrease.

I should also mention that Bill Easterly, one of my favorite thinkers, has been having a back and forth of a kind with Sachs.



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