The Agenda

Jeffrey Sachs Has Been a Stimulus Critic for a Long Time

Many observers were surprised when Jeffrey Sachs co-authored an op-ed in the Washington Post with Joe Scarborough that made the case for fiscal consolidation. While Scarborough favors reducing government expenditures and, if necessary, raising taxes slightly to make a deal, Sachs favors sharply increasing government expenditures and raising taxes, including taxes on middle-income households via carbon pricing and other Pigovian taxes and on high-earners via higher capital income taxes, etc., to close yawning deficits. Back in the fall of 2011, Sachs made the case for what he describes as a new economic strategy:

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.)

More recently, he has elaborated on why he is skeptical about the virtues of fiscal stimulus:

So, to summarize, what is crude Keynesianism?

(1) The belief in large, stable, and predictable multipliers on taxes and transfers;

(2) The belief that our problems are due overwhelmingly to a deficiency of aggregate demand, rather than to structural problems that need a long-term approach;

(3) The belief that a rapidly rising debt-GDP ratio is largely benign because interest rates are low today and will stay so indefinitely;

(4) The belief that “to a large effect, spending is spending,” thereby catering to waste and vested interests while ignoring America’s urgent investment needs.

In my view the result of this misguided approach, adopted by the Obama Administration, has been a large build-up of public debt with no long-term benefits for an economy that instead needs a public-investment-led recovery. If we had followed Mr. Krugman’s long-standing advice to double down on this failed approach the situation would have been even worse. Yes, Mr. Krugman, I believe that you are a crude Keynesian at a time when we need subtler, surer, longer-term policies.

Sachs is, in my view, far too sanguine about the prospect that the national investments he has in mind will be well-designed and well-executed, which is part of why I’m more inclined towards Scott Sumner’s views on stimulus:

The standard economic model says that both fiscal and monetary stimulus boost aggregate demand (nominal spending). Whether that shows up in the form of higher inflation or more real growth depends on supply-side factors — like whether there are large numbers of unemployed workers or factories sitting idle that might respond to greater demand, or whether there is little such “slack” (such that new demand would lead mostly to higher wages and prices). If there is a difference between the two policy tools, it is that fiscal stimulus would actually be the more inflationary policy, because it consists of government spending (which is often less efficient, and hence may reduce aggregate supply and create shortages that boost prices), while monetary stimulus enables more private-sector spending. Indeed, free-market economists should be especially partial to monetary stimulus on these grounds.

Regardless, it’s nice to see Sachs make a social-democratic case for fiscal consolidation, if only to demonstrate that not every public intellectual is governed by mood affiliation. 



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