Jeffrey Sachs wrote a first rate column for the FT last week. Sachs has not always been a favourite of mine, but he's pretty much got this one right. As he puts it:
America's economic debate is stuck in a time warp. On the one side, Mitt Romney's conservative advisors defend tax cuts for the rich and spending cuts for the poor as if we hadn't just lived through 30 years of failed Reaganomics. On the other side, Paul Krugman defends crude Keynesianism as if we've learned nothing in recent years about the severe limitations of short-term fiscal stimulus. Both sides merely raise their decibel levels at each announcement of bad news, as with last Friday's data showing the failure of the US economy to generate sufficient new jobs in June.
Of course I like the Republicanism bashing:
The two sides of the debate live in timeless and increasingly irrelevant ideologies. The prescriptions of free market economics peddled by the Republicans — slash taxes and spending, end financial and environmental regulations — are throwbacks to the 1920s, far more naïve than even modern conservatives such as Milton Friedman and Friedrich Hayek, who recognised the need for government intervention for the poor, the environment, health care and more. Today's free market ideologues are uninfluenced by the lessons of recent history, such as the financial crisis of 2008 or the devastating climate shocks hitting the world with ever-greater frequency and threatening far more than the economy. Their single impulse is the libertarianism of the rich: the liberty to enjoy one's wealth no matter what the consequences for the economy or society.
That's spot on. But it has to be said he has exposed Krugman's weak underbelly too - for he has one, and that's that he is (dare I say it) just an economist. As Sachs puts it:
In Paul Krugman's telling, we are in the 1930s. We are in a depression, even though the collapse of output and rise of unemployment in the Great Depression was incomparably larger and different in character from today's economic stagnation. Krugman channels Keynes, yet Keynes lived in a very different era. In Krugman's simplified Keynesian worldview, there are no structural challenges, only shortfalls in aggregate demand. There is no public debt problem. There is no global competitiveness challenge, since “competitiveness” is a myth when applied to national economies. Fiscal multipliers are predictable, timeless, persistent, and large. All growth reversals can be solved through larger deficits. Politicians can be trusted to design short-term stimulus spending programmes of hundreds of billions of dollars. Tax cuts are about as good as increases in government spending, and short-term boosts in spending are about as good as long-term public investments. Not one of these conclusions stands scrutiny.
That's harsh, but in the sense that it says Krugman is reverting to type in making unrealistic assumptions with limited relationship to the real world, then he has a point - even if I am sure some will seek to sugest Sachs is himself offering a generalisation. Many will however recognise the relevance of Sachs saying:
Why have we come to this vacuous debate between a free-market extremism and a Keynesian superficiality that addresses none of the subtleties, trade-offs, and uncertainties of the real situation? There are probably two main reasons. First, the world is noisy and overloaded with media messaging. Getting heard seems to require a short, sharp and exaggerated idea endlessly repeated: economics as a media brand. Second, the world is facing novel problems at the global level, and novelty is hard to factor into economics, which is a rigid, ideological, theoretically based, and largely backward-looking field.
True, but amazing really.
And I think some issues that Sachs highlights do suggest areas where Krugman is weak. For example (and I edit heavily):
First, the financial markets are global while regulation is at best national (and sometimes almost non-existent or criminal). This is killing the euro, but it is also undermining financial regulation and monetary policy everywhere.
True: real reforms are needed.
Second, the world of work is being fundamentally transformed. Low-skilled work is the work of offshore workers, or immigrants, or machines.
True: almost ignored is the fact that capital now has the right to abuse labour with legal impunity under many trade and labour agreements. No wonder we're in crisis.
As important:
Third, tax collections today are little more than a Swiss cheese of tax evasion and tax havens for the rich and corporations.
An absolutely fundamental issue: states will never balance their books if they can't collect tax.
Fourth, we are in the age of the Anthropocene, where global growth is limited by natural resources, climate change and hazards.
But unconditional growth remains the objective for most economists.
Fifth, the combination of falling tax collections on capital income and the rich, and rising costs of retirement and health care for a quickly aging population, poses serious long-term solvency challenges for most of our governments.
That, or old people are going to die: you take your choice. But those are the options if we do nothing.
Sixth, in a world that requires serious regulation — for the environment, land use, financial markets and more — there are bound to be problems in coordinating public policies with private investments, and across sectors of the economy. Coherent economic strategies can help to break through investor pessimism and stagnation. Well-designed public investments (eg in infrastructure) can unlock significant private investments as well.
Sure, that's Keynesian, but it's more than that: Keynes would have had people dig holes and fill them in. we know that is now nothing like good enough.
As Sachs concludes (edited):
In short, we need new economic strategies to overhaul broken systems of finance, labour markets, taxation, ecological management, budget management and investment incentives. Those challenges cannot be fixed through lowering taxes on the rich or higher fiscal deficits to create aggregate demand.
It's time we moved beyond the Republican Party economics of the 1920s and the Democratic Party economics of the 1930s, to a new macroeconomics for the 21st century.
It's impossible not to agree. The "none of the above" choice when looking at the branches of conventional economic thinking (and as Krugman showed in his recent debate with Steve Keen he's definitely in the conventional thinking bracket) is the only ratyional one to pick.
And what is really needed is policy that tackles global capital and makes it accountable locally by changing accounting, defeating tax havens, enforcing regulation, taming financial flows, holding banks to account, and in the process restoring the right of countries to raise taxes in fulfilment of their democratic mandate.
It's a choice, as Dani Rodrik say: global capital v democracy and the nation state. 1% including most economists are on one side and 99% on the other. The 99% have to win this one. Sachs is right in saying most economists have not embraced this reality.
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Good post. But it’s also about moving people from being passive consumers to active participants. That is the real challenge: to get people to utilise what is around them rather than buy stuff all the time. And when they buy stuff, to ask serious questions about how it is made.
There is a single question I’d like to ask politicians: why do we need growth? At what point have we got enough? Why is it in any sense positive to anyone if people upgrade their mobile phone every year?
And this is why I read this blog. Not because I agree with you, but because it is obvious to me that the old ways of thinking on both left and right have failed us. I don’t know what will come next, but this blog is full of information that can inform thinking.
Thank you
Keynes was just trying to make a point, not a policy:
“If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is.
It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing.”
These days we have gideion osborne suggesting that spending departments run year on year surpluses.
The equivalent of burying pond notes in the ground but not digging them up.
This is a policy, and it has no point.
I’ diiasgree about left and right failing, the left succeeded in creating social and economic capital and the right succeeded in stealing it.
Agreed. As Lance Taylor points out, at the end of Chapter 4 of his “Reconstructing Macroeconomics”, Keynes notion of “… effective demand remains THE valid approach to macroeconomics”. Clearly Sachs isn’t going to help anyone to understand that.
Given the damage that Jeffrey Sachs crude free market views and failure to understand the structural challenges did to many ordinary citizens in Eastern Europe in its transition from communism – I don’t think Krugman should worry too much about false accusations being made with regard to his peddling a crde version of Keynesianism. If Sachs could bother to search Krugman’s website and writings he wll seen that he has already addressed most of the issues that Sachs only now raises.
I hint at that in my opening….
But I do think he is pointing out Krugman blind spots – and the do exist e.g. the real nature of money, tax havens etc
I don’t think Krugman is blind on tax havens
http://krugman.blogs.nytimes.com/2012/07/12/ask-not-what-your-country-can-do-for-you/
or money for that matter
http://www.princeton.edu/~pkrugman/oxrep.pdf
and I hadn’t noticed him having a blind spot on the environment since you ask
http://www.nytimes.com/2010/04/11/magazine/11Economy-t.html?pagewanted=all
This is the 2nd time Sachs has accused Krugman of crude Keynesianism. Perhaps what is really crude is Sachs rather weak attempt to fuse free market economics with a liberal right on apprach. There are many things Krugman might be accused of but crudeness isn’t one of them.
I’d better read some more Krugman…
As I’ve made clear – given a choice Sachs has never been my #1
Equally – I have felt some of the structural issues have been missing in Krugman
If you’re saying I’m wrong I’ll go re-reading
I haven’t read the latest book either. Must get for holiday…
That said I’m sure that Krugman can and will defend himself
His blog on the NY Times website and yours are among my must reads. To be fair to Sachs – he and Krugman are among the few economists with academic standing who do try and speak to the general population.
An economic rather than socio-political, revolution is needed. Someone somewhere must do what Einsten did for physics or Darwin did for biology!
Try The Courageous State
Better still try reading Wynne Godley, Bill Mitchell, or Randall Wray. Don’t bother with Jeffrey Sachs.
Indeed, turning out the same old shopping list of circumstances as crises is hardly breaking ground on “a new macroeconomics for the 21st century”.
Macro economics seems to be a bit livelier than it has been for years, but you wouldn’t know it listening to Sachs.
“In Krugman’s simplified Keynesian worldview, there are no structural challenges, only shortfalls in aggregate demand. There is no public debt problem.” Sachs
Brad De long’s response to this Sachs piece:
“Krugman’s line–Krugman’s consistent line–has never been that we do not have structural problems. Krugman’s consistent line has been:
We have an urgent and dire aggregate demand shortfall problem.
We know how to cure our urgent and dire aggregate demand shortfall problem.
Our structural problems are a lot more manageable and a lot less daunting at full employment than in a deep depression.”
In other words. Why shouldn’t we address the immediate short term aggregate demand problems and tackle other longer term structural issues at the same time. Krugman responds himself with something like ‘why wouldn’t you replace a flat battery because the transmission is faulty?’ Sachs meanwhile presents very little in the way of remedies beyond “education, aligned with the need for more sustainable technologies and “smarter” infrastructure…”
We’ll just wait a generation for those to kick in then shall we?!
We hear less about balance of payments problems than in the past but they are part of the ‘competitiveness challenges’ mentioned in the extract.
Keynes had some interesting ideas, such as a concept of ‘bancor’ as a way of settling surpluses and deficits which was rejected at Breton Woods and we have used the Dollar as a reserve currency.
Not having done the 10,000 hours which some reckon is necessary to become a master in a subject, I can only offer an opinion rather than a judgement, but it seems we haven’t yet exhausted Keynes intellectual legacy. It might even help the plight of low performing economies.
I was pretty harsh about the Sachs article on Twitter… overly so in retrospect. The second part of Sachs’ article is pretty good, for the reasons Richard points out here. What annoyed me about the first part was that Sachs treats Krugman as a straw man… for example, to my knowledge Krugman has never said that any kind of stimulus will do, no matter what it’s spent on. Nor has he said that tax cuts are just as effective as investment spending for creating a stimulus. Nor that short-run stimulus is all the US economy needs, and the long-run issues are irrelevant. There may well be people making these claims, but Paul Krugman is not one of them, and I think it was silly for Sachs to claim that he was. That said, Richard is quite right that Krugman doesn’t focus enough on the big systemic changes to capitalism that are needed if we are to survive the current crisis in any kind of shape whatsoever.
Howard,
A well balanced response
Thanks
Richard
Krugman blogs for multiplier: June 26, 2011 ‘The Mafia Multiplier’, September 30, 2010 ‘Procrustean Economics (Wonkish)’, and ‘October 25, 2010 ‘A Far Away Country Of Which We Know Nothing’.
On the envirnoment: artcle ‘Republicans Against Science’ August 28, 2011 in which he says “the scientific consensus about man-made global warming – which includes 97 percent to 98 percent of researchers in the field, according to the National Academy of Sciences – is getting stronger, not weaker, as the evidence for climate change just keeps mounting.”
His reply to Sachs’ article blogs July 13, 2012 ‘Simple Isn’t Simplistic’ and July 12, 2012 ‘Magneto Muddles’.
His views put pithily, blogs July 6, 2010 ‘Lincoln, McClellan, And Stimulus’, October 25, 2010 ‘Sam, Janet, and Fiscal Policy’, and January 14, 2011, ‘Dollar/euro Irrelevance’ for capital flows argument.
Thanks!
I was sure you’d have them
Appreciated
There is a branch of economics that provides answers, or at least explains policy implications, though it is pretty unconventional… It is called Modern Monetary Theory or MMT for short.
Those who are interested and have MP3 players may be interested in this podcast of Krugman’s lecture to the LSE here http://www2.lse.ac.uk/newsAndMedia/videoAndAudio/channels/publicLecturesAndEvents/latest100.aspx?top=100
Available on iTunes U – lots of other interesting stuff as well.
I thought I’d better take a proper read of this blog posting, and then respond accordingly. When Krugman recently said that he’d had a downer on old Keynesian economics until looking at Japan in the late 1990s, I thought they’d be big issues here (blogs August 26, 2011 ‘Academic Debate, Real Consequences (Wonkish)’, June 20, 2011 ‘Woodford on Monetary and Fiscal Policy’, March 18, 2011 ‘Credibility and Monetary Policy in a Liquidity Trap (Wonkish)’).
So here’s my response to Sachs’ points as Krugman would see it:
1. Euro area problem is down to gold standard-like sticky prices and wages: Krugman suggests raising the inflation target and that Germany borrow to transfer funds to the periphery.
2. March 19, 2011 ‘Mind-Changing Events’ Krugman said “I found myself seeing a real role for capital controls to deal with the effect of currency crises in countries with large foreign-currency-denominated debt.”
3. Bagehot’s Lomard Street (1873) was heeded to stop the bank runs, which is why today is better than 1930s for unemployment, when 1/3 of US banks failed as well as Germany, Austria banks.
4. Unemployment is currently cross-sectional, not in one or two sectors, which indicates a demand-side problem.
5. The public debt problem exists in most countries because of the crisis of 2007-8.
6. ‘“Competitiveness” is a myth when applied to national economies’: that’s for floating exchange rates to decide, but not solely when up against the zero lower bound when liquidity trap economics come into play.
7. Stiglitz wanted $1 trillion, Krugman $1.2 trillion stimulus for 2009 in US.
8. ‘Tax cuts are about as good as increases in government spending’: Krugman never said that.
9. For example, Krugman discusses tax avoidance p258 of his Conscience of a Liberal (2007), tax evasion in his 14th May 2002 article ‘the great evasion’; Krugman is all over tax, and puts higher rate at 70-80%.
10. ‘Keynes would have had people dig holes and fill them in. we know that is now nothing like good enough’: wasn’t that just an absurdity by Keynes to make a point?
11. Krugman on Steve Keen blog is: March 27, 2012 ‘Minsky and Methodology (Wonkish)’. Is this, not Sachs, where your problem with Krugman lies?
Will go and read!