Noted for March 11, 2013
Monday Reading: The General Theory of Employment, Interest and Money by John Maynard Keynes: From Chapter 24

Department of "HUH?!?!?!": I Really Do Not Understand Jeff Sachs These Days: Mark Thoma Tries to Explain Weblogging

Mark Thoma tries, but he fails. Either I am a bear of very little brain indeed, or Sachs is just not making any sense at all:

Economist's View: Crude Sachsism: On Twitter, [Sachs] goes a bit further:

@madarts13 @ktguru @joenbc @kdrum I don't. I think short-run stimulus has little effect on GDP. I want long-term growth strategy instead. — Jeffrey D. Sachs (@JeffDSachs) March 9, 2013

He can think whatever he wants, but the evidence says otherwise. In a severe recession government spending multipliers are much larger than in normal times. That's why this statement is so puzzling:

…First off, here is what I mean when I say that Krugman is a crude Keynesian... There are four elements of crude Keynesianism and, indeed, of Krugman's position: (1) The belief that multipliers on tax cuts and transfers are stable, predictable and large; (2) The belief that America's employment and growth problems are overwhelmingly cyclical, not structural, and therefore remediable by short-term aggregate demand management; (3) The belief that a growing debt burden is a minor nuisance as long as the economy is in recession; (4) The belief that for practical purposes, the most urgent need is to raise aggregate demand rather than to focus on the quality and type of public spending. I believe that all of these positions are misguided.

Again, he can believe whatever he wants, but the evidence is against him.

On (1), as already noted, Krugman has NOT said that multipliers are "stable, predictable, and large." He is saying what both the theorists and empiricists looking at this are saying, that multipliers are larger in a liquidity trap….

Second, asserting that our problems are mostly structural is fine, but go to the SF Fed… go to paper after paper and they all say… there is a very large cyclical component to our problem….

On (3), where's the evidence that financial markets are worried? It's not there.

And (4) -- the charge that Keynesians/Krugman don't worry about the quality of spending -- is again wrong….

[T]he weird thing [about Sachs] is the assertion about no infrastructure spending [in the Recovery Act]. Let me turn it over to Ryan Cooper:

Jeff Sachs ... [has] one of the most bizarre pieces of economic analysis I’ve seen, arguing among other things that 1) the stimulus was too focused on short-term stuff like tax cuts which 2) aren’t effective stimulus anyway (huh?) and 3) should have had much more long-term investment…. The stimulus did have money for renewable energy ($90 billion in fact), upgrading our rail network, and highway maintenance. A book has been written about this very topic, large sections of which is devoted to lamenting the fact that lazy, irresponsible pundits and reporters then and now keep complaining that the stimulus didn’t have things it in fact had.

Peggy Noonan got hammered for complaining Obama hadn’t done infrastructure spending he had in fact done, but no one was surprised because it’s Peggy Noonan and she’s basically your crazy aunt. But Jeff Sachs is supposed to be a professional economist….


What are some of the structural problems? These include large-scale offshoring of jobs, large-scale automation of jobs, decline in demand for low-skilled workers, skill mismatches, broken infrastructure, and rising global energy and food prices. These require various kinds of targeted public investment spending, not simply aggregate demand.

This is silly, most of those factors were already present prior to the recession. The recession added a large cyclical component on top of whatever pre-existing structural issues were in place.

To summarize… despite considerable evidence to the contrary, Sachs position is that short-run multipliers are small, and even if they aren't there's little cyclical unemployment. So we need to do the things I was pushing prior to the recession instead….

Now the deficit hawkery:

Third, crude Keynesians like Krugman believe that we don't have to worry about the rising public debt for many years to come, perhaps well into the next decade. This is remarkably shortsighted. The public debt has already soared, from around 41 percent of GDP when Obama came into office to around 76 percent of GDP today (and with no lasting benefit to show for it). If Krugman had his way, and deficits were not restrained, the debt-GDP ratio would already be above 80 percent by now and would be rising rapidly towards 90 percent and above (as shown in the recent CBO alternative scenario).

No lasting benefit? Is he serious? The automatic stabilizers alone had a huge benefit….

Not sure I can go on, but here's more….

It's true that we've not paid heavily so far for this rising debt burden because interest rates are historically low. Yet interest rates are likely to return to normal levels later this decade, and if and when that happens, debt service would then rise steeply, increasing by around 2 percent of GDP compared with 2012. Many people seem to believe that we can worry about rising interest rates when that happens, not now, but that is unsound advice. The build-up of debt will leave the budget and the economy highly vulnerable to the rise in interest rates when it occurs. The debt will be in place, and it will be too late to do much about it then.

Yes, because of problems that might happen "later this decade" we should let people suffer now (and besides, it's all structural and multipliers are zero).

Let's move to [Sachs's] fourth point:

Fourth, crude Keynesians believe that for all intents and purposes, "spending is spending." ...

No [Krugman] doesn't. Not at all. Again, this is just an argument that short-run multipliers are zero, blah, blah, blah. Krugman has made it clear that quality of spending matters, but if we can't get infrastructure spending in place in time we should help people in other ways. Sorry if that interferes with Sach's pet issues.

Moving along:

This approach is disastrous both politically and economically. Progressives like myself believe strongly in the potential role of public investments to address society's needs... Spending is not spending. The U.S. needs productive public investments, not wasteful spending….

Yes. it's very wasteful to help the unemployed through non-infrastructure spending. Wonder how he feels about food stamps? Are those okay?

Let's go to Sachs' conclusion:

Mr. Krugman, I believe that you are a crude Keynesian at a time when we need subtler, surer, longer-term policies…. (1) Decade-long public investment programs in renewable energy, upgraded public infrastructure, fast rail, job training and the like; (2) Adequate fiscal revenues (including tolls on infrastructure) to pay for these investments over the course of a decade, including a downward path of the debt-GDP ratio; (3) Increased revenues through taxation on high net worth, financial transactions, high incomes, capital gains and carried interest, offshore corporate earnings, and carbon emissions, and a stiff crackdown on tax havens and phony transfer pricing….

I hope Jeff Sachs does manage to get his favorite projects in place -- I support them -- but not at the expense of people who have already spend far too long struggling to get by as they look for work.