Jeff Sachs on Fixing What Ails the West

♠ Posted by Emmanuel in , at 8/19/2011 12:02:00 AM
Never let it be said that Jeff Sachs has modest ambitions. After all, he's the guy who predicted that The End of Poverty was not only possible but attainable in the not-so-distant future. While those of us who lack such massive self-confidence and clairvoyance are still twiddling our thumbs, rest assured that Sachs has gone on to other Big Things in the meantime.

Take, for example, his new missive on solving woes afflicting Western countries. With stock markets taking a synchronized nosedive, Sachs offers his prescriptions on how effective governance can save these countries from...miserable fates. At first, he attributes these woes to a growing inability to compete with developing countries:
A failure of economic strategy and leadership lies behind the near simultaneous collapse of market confidence in the eurozone and US economies. No need to blame the rating agencies: governments in Europe and America have been unable to cope with the realities of global capital markets and competition from Asia – and deserve the lion’s share of the blame.

I’ve watched dozens of financial crises up close, and know that success means showing the public a way out that is bold, technically sound and built on social values. Transatlantic leadership is falling short on all counts. Neither the US nor Europe has even properly diagnosed the core problem, namely that both regions are being whipsawed by globalisation.

Jobs for low-skilled workers in manufacturing, and new investments in large swaths of industry, have been lost to international competition. Employment in the US and Europe during the 2000s was held up only by housing construction stoked by low interest rates and reckless deregulation – until the construction bubble collapsed. The path to recovery now lies not in a new housing bubble, but in upgraded skills, increased exports and public investments in infrastructure and low-carbon energy. Instead, the US and Europe have veered between dead-end, consumption-oriented stimulus packages and austerity without a vision for investment.
So far, so unsurprising: It's the old competitiveness spiel (nevermind that most developed countries rank higher than developing ones on such measures). But Sachs then goes straight into "class warfare" mode. You have to wonder what's gotten into all these more-or-less conventional economists like Sachs and Roubini invoking such leftish rhetoric. Maybe they should have studied IPE instead of boring old economics. Sachs's targets include the bourgeoisie who have been exceedingly successful in shrinking their tax burden as well as footloose multinationals using the world as their oyster for tax avoidance purposes. What's next? Will he be quoting Ronen Palan on tax havens? I must toot IPE's horn by saying that its scholars have looked at these issues long before economists did. Anyway, let's continue...
The simple fact is that globalisation has not only hit the unskilled hard but has also proved a bonanza for the global super-rich. They have been able to invest in new and highly profitable projects in emerging economies. Meanwhile, as Warren Buffett argued this week, they have been able to convince their home governments to cut tax rates on profits and high incomes in the name of global tax competition. Tax havens have proliferated even as the politicians have occasionally railed against them. In the end the poor are doubly hit, first by global market forces, then by the ability of the rich to park money at low taxes in hideaways around the world.

An improved fiscal policy in the transatlantic economies would therefore be based on three realities. First, it would expand investments in human and infrastructure capital. Second, it would cut wasteful spending, for instance in misguided military engagements in places such as Iraq, Afghanistan, and Yemen. Third, it would balance budgets in the medium term, in no small part through tax increases on high personal incomes and international corporate profits that are shielded by loopholes and overseas tax havens.
Dodgy notions of competitiveness aside, I have few quibbles with Sachs on Western countries taking concrete steps to improve revenue generation.