Monday, October 10, 2011

Building the Foundations of a Wealthier America

Jeffrey Sachs, author of the new book "The Price of Civilization", has recently written an article entitled, "A New Direction for American Economic Policy".  In the piece, he lays out his argument for investing in the future of America and willingly raising taxes to do so.  He also belittles the persons who view themselves as the heirs of John Maynard Keynes' legacy and advocate "jolt[ing] the economy back to prosperity through temporary stimulus."  One might imagine from my previous post A Case for Expansionary Federal Fiscal Policy that my position is far from his.

On the contrary, I read Professor Sachs' article with much satisfaction.  Not only do I largely agree with him, it happens to prepare the way quite nicely for this current post.  The foundation was laid for a general statement on fiscal stimulus as the great solution to the United States' current problems, but the nature of the stimulus should be along the lines of long-term investment which Dr. Sachs has long advocated.  The master, John Maynard Keynes, jokingly suggested dumping treasure chests full of money or building large-scale projects like the pyramids to stimulate the economy.  His point was not that the government should intentionally waste money, but that, even wasting money was better than leaving the economy to languish in a depression.  Preferable, by far, is the idea of making investments that will serve the people and the economy for years to come.

Yes, fiscal stimulus has a multiplier and can get the economy going, but it is always good to promote further growth with government spending.  There are short term things that can help people out, but there are also projects that can be undertaken to make the coming American century more prosperous for ourselves and generations to come.

Professor Sachs has correctly pointed out that there is a serious gap between the prospects of those with at least a bachelor's degree are far better than those with only a high school education.  Over the long term, as the U.S. moves toward higher productivity activities, a broad class of college-educated workers in the labor force will improve conditions.  Further, countries like Denmark have succeeded in decreasing the amount of unemployed by focusing on retraining workers when they are laid off, so that they can rejoin the workforce in good paying jobs.  This is a structural, long-term issue, but spending more on education could provide some stimulus and give long-run returns.  Furthermore, it can increase the proportion of the population that is realistically employable and likely to find a good paying job.

The United States has far too much infrastructure which is in poor repair.  There are certainly projects in your own community that, with reflection, you will feel need to be undertaken and would significantly improve your own life.  There are roads, bridges, levies, ports, airports, telephone lines, power lines, telecommunications infrastructure and other public works that are in poor repair, in need of upgrading or even expansion.  The United States needs to look at broadband access the same way it used to look at rural electrification.  Access to the internet provides the same kinds of access to opportunities that running electricity and phones lines used to in the 1930s.  These can bring real returns because they facilitate more efficient trade, communications, public transportation and power transmission, all of which are important support systems for a rapidly growing high technology economy.  It could even be that the postal system could be reworked somewhat to realize further efficiency if long-term investment is borne in mind.

Basically, there are many projects that are worthy of our support which can help build a more productive society in the future.  With ten-year treasuries at about 2% interest and a depression plaguing the U.S. economy there is little rationale to put off investments in America's future.  The next few years, the whole project of investment can be undertaken on a large scale with little regard to the cost, since there's a liquidity trap and a depression.  Once private consumption has gotten back around the trend, it can be scaled back, but the U.S. should never get back to the level of public investment that it was before the crisis.


  1. Your statements are sound.

  2. Well, I'm glad that you think so, anonymous. If you follow the argument of Professor Sachs' article and, no doubt, the book, it is generally an argument that the U.S. should invest a great deal more in education, infrastructure, etc., and pay for it through increased taxes. I am not sure about Mr. Sachs' personal opinions on Keynesian policy per se, although in the article he indicates that the Democrats claiming "to be the heirs of John Maynard Keynes" are missing the point.

    I choose to read Mr. Sachs' article in such a way that he appears to be talking about the "temporary nature" of relief, especially the temporary infrastructure spending. As I understand his point, the government should be firmly committed to maintaining high levels of public investment, including in education and infrastructure, and be willing to raise taxes to finance them over the long-run.

    I have three separate arguments. Basically, right now, the United States continues to suffer from a large shortfall of aggregate demand for a number of reasons, some of which I have likely already covered (asset bubble, excessive personal debt). In addition to a depression, the U.S. appears to have a liquidity trap, where monetary policy has limited, if any effectiveness. The clear answer at that point is for the government to take up the slack in the economy. Then it's a question of how to do that and infrastructure spending and investments in education seem logical, since they can increase future productivity, raising long-term potential GDP.

    Beyond that, it is absolutely desirable that the United States would continue substantial investments into the future. Frankly, not to do so would damage U.S. competitiveness. An interesting discussion on public investment can be found in a document put out by the Commission on Growth and Development, called "The Growth Report". Here's the link:

  3. Interesting article Julian; Maybe you could take a look at the Australian example re: public sector internet investment where there is a massive public investment in the works for a fiber-to-the-home National Broadband Network. $AUS 40 billion actually - and Australia is less than 10% the population size of the US.


  4. The problem isn't lack of worthy programs...the problem is that you can't guarantee that Sachs suggestion would be the best possible use of limited public resources.

    The only way to guarantee the best possible use of limited public resources would be to allow taxpayers to directly allocate their individual taxes among the various government organizations at anytime throughout the year. This would force them to consider the opportunity costs of their tax allocation decisions.

    If this concept doesn't make any sense then you might want to read this essay by Bastiat...What Is Seen and What Is Not Seen.

  5. @Xerographica: To me, the "best use" argument is a little misdirected, since I am not trying to outline the exact allocation, but to indicate that there should be a larger commitment of government resources to investment in public infrastructure or other forms of capital (including education). As for your specific argument about the self-directed tax allocation, I very much disagree. First, we're talking about public goods, by and large, where the private market has insufficiently directed resources toward specific public purposes. Second, to expect individual taxpayers to properly allocate funds is very problematic. Basically, I think that the resources would mostly find themselves in a few highly visible public efforts, while many areas would no doubt be starved of funding. If you were using a cost-benefit analysis argument, I'd probably agree with you, as would almost anybody who thinks seriously about economics.