Jeff Sachs' Amazing Takedown of US Stimulus

♠ Posted by Emmanuel in at 7/22/2010 09:49:00 PM
It's not often that I agree with the famed development economist Jeffrey Sachs of Columbia on much of anything, but he's now delivered a pretty damning indictment of the senselessness of US stimulus. (This contribution is yet another in the series of op-eds run by the FT on the stimulus versus austerity debate.) First, he compares the rudderless way the US has gone about its activities in relation to China, which has carefully studied what sort of infrastructure improvements the PRC needs in order to grow. Yes, there are good reasons why China is leaving America in a trail of dust. Next, he slams calls for further (undirected) stimulus as spending good money after bad in throwing everything against the wall--including a lot of pork--to see what sticks. Call it the revenge of Yerkes-Dodson:
Despite the evident need for a rise in national saving after 2008, President Barack Obama tried to prolong the consumption binge by aggressively promoting home and car sales to already exhausted consumers, and by cutting taxes despite an unsustainable budget deficit. The approach has been hyper short term, driven by America’s two-year election cycle. It has stalled because US consumers are taking a longer-term view than the politicians.

By contrast, the administration’s interest in boosting investment has been haphazard. Mr Obama has shown a strange inability to articulate an operational and forward-looking policy framework in signature areas such as healthcare, energy, climate change, and long-term fiscal policy. At a time when China is building hundreds of miles of subway lines, tens of thousands of miles of highways, a couple of dozen nuclear power plants, and a network of tens of thousands of miles of high-speed intercity rail lines, the US struggles to launch a single substantial project. China saves and invests; the US talks, consumes, borrows, and talks some more.

It is wrong in this context to believe that the only choice is further fiscal stimulus versus a repeat of the Great Depression. Further short-term tax cuts or transfers on top of America’s $1,500bn budget deficit are unlikely to do much to boost demand, while they would greatly increase anxieties over future fiscal retrenchment. Households are hunkering down, and many will regard an added transfer payment as a temporary windfall that is best used to pay down debt, not boost spending.
So no and never--the US McMansion-superconsumption complex should never be reflated since it's not likely to work. It didn't before, so there's no reason to think it will now. On its current path, America will have hell to pay largely of its own making. If we could only get Sachs to be a full-time critic of the United States' fiscal policies instead of a leading voice in calling for massive aid...