Economist Jeffrey Sachs: Consumption-Led Recovery Won't Work

Wednesday, 20 Nov 2013 10:19 AM

By Michelle Smith

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The nation doesn't need more shortsighted, ineffective stimulus. This country needs a new kind of macroeconomics, says Jeffrey Sachs, author and director of Earth Institute at Columbia University.

Debt-financed consumption and a housing binge caused the financial crisis. And though the country has been reeling since 2008, policymakers have continued making the same mistakes — trying to stimulate more consumption, Sachs writes in a blog for The Huffington Post.

"Consumption-led recovery was the wrong way to go then and it still is now," Sachs insists.

Editor’s Note:
Obama Donor Banned This Message (Shocking)

Temporary stimulus, including measures like tax cuts and cash for clunkers, are shortsighted and will not work, he argues. Careless spending left the people "broke and exhausted" in the past and it continues to fail.

What we needed after the crisis and "what we need now is a new kind of macroeconomics; one that aims for investment-led growth," writes Sachs.

"Investment-led recovery requires a clear identification of our society's longer-term needs, needs that can be filled through complementary investments by the public and private sectors," he explains.

"America urgently needs investments in modernized infrastructure, advanced science and technology and job skills appropriate for the 21st century," Sachs argues.

From low-carbon energy systems to green buildings to healthcare, the IT revolution could remake our economy, he claims. But as countries such as China are shaping their economies for technological advancement, the United States is just sitting on its capability and only a "paucity of actual investments" are being made.

"The wondrous IT revolution, with its potential to remake our economy as a world leader in efficiency and quality of services, needs to be much more than new apps for smartphones and new ways to sell online advertising through social media," Sachs contends.

President Obama has been "badly misled" by "woefully short-sighted advisors" and the simplicity of Keynesian ideas that larger budget deficits and short-term stimulus would revive the economy.

Sachs says it's sad that the president was led to the point of believing that "'shovel-ready' projects would surge with just a little fiscal pump priming."

"The U.S. economy, and the world economy, cannot recover sustainably by propping up consumers for yet another binge," Sachs warned in 2009, and it still applies today.

He expresses "frustration" that Nobel Prize winning economist Paul Krugman continues to discuss the nation's stagnant economy while giving little attention to the fact that "his own preferred stimulus policies can't solve the problem."

In his New York Times column, Krugman says for the time being credit must be easy and interest rates must remain low.

"Again, the evidence suggests that we have become an economy whose normal state is one of mild depression, whose brief episodes of prosperity occur only thanks to bubbles and unsustainable borrowing."

Krugman believes central bankers need to stop talking about exit strategies.

"Easy money should, and probably will, be with us for a very long time," he writes. But he acknowledges that people hate to hear that sort of talk.

"Economics is supposed to be about making hard choices (at other people's expense, naturally). It's not supposed to be about persuading people to spend more," he concludes.

Editor’s Note: Obama Donor Banned This Message (Shocking)

Related Stories:

Joel Naroff: Why This Economic Recovery Is So Slow

Business Insider: Slow GDP Growth in the US Could Be Permanent

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