Keynesians like to say that there is a savings glut (an excess of saving over investment). They try to remedy it by spurring consumption. This is a mistake. There is an investment shortfall, because the financial, regulatory, and policy barriers to high-return investments have not been addressed. America urgently needs investments in modernized infrastructure, advanced science and technology, and job skills appropriate for the 21st century. We are sitting on top of an information revolution and nanotechnology revolution that could positively reshape healthcare, education, transportation, low-carbon energy systems, green buildings, water conservation, and environmental safety.
Pointer from Mark Thoma. Sachs and I would probably disagree about the proportion of the solution that consists of government leading vs. getting out of the way. However, his diagnosis seems to me to make some sense, unlike the savings glut story.
Is there a strong correlation between different governments and investment? The Chinese govt is hardly “out of the way” yet investment is massive. I see the lack of US investment as driven by a heavily-indebted consumer. I.e., your future customer has pulled forward a lot of their consumption therefore the future looks bleak.
The other side of this equation is high corporate profits.
If there was more certainty about how firms could use that money to build the future, they would be plowing their profits back into their comparative advantages. Instead they are producing high profits, essentially saying either (a) we don’t know what more we can do with this money or (b) we don’t trust the policy uncertainties of the future enough to invest this money in ourselves. So, here, take the profit and go figure out something to do with it yourself.
They could be saying both (a) and (b). Government policy can’t do much about (a), perhaps with the exception of more military / intelligence R&D spending. It can offset (a) with some (b), but how you trust it not to undue (b) in the future?
“…. education, transportation, low-carbon energy systems, green buildings, water conservation, and environmental safety…”
Sachs wants investments in the “green” sectors of the economy, which in my opinion, are improductive and a waste of resources. Do we need more green building? Do we need more water conservation? I happen to be a water engineer, and the water scarcity has ended when we can produce drinking desalinated water at 0.5 dollar per 1000 liter and the price is going down. What does he mean massive investments in environmental safety? More EPA regulation? I think Prof. Kling has not thought this over.
I sort of agree with Sachs in his diagnosis, but I always find his prescriptions troubling.
Honestly, if we have to choose forms of government intervention, I’m not sure if I prefer the QE/quasi-keynesian stimulus or Sachs’ grand central plan….they both strike me as pretty bad.
Sachs apparently sees little to no use for the market test to determine what firms, technologies, or people are worthy of investment dollars….his prognosis will do.
I just got done reading Antifragile by Nassim Taleb, I’d guess that if he were reading that he’d accuse Mr. Sachs of the following sings:
Iatrogenics: Making things worse by excessive tinkering…mainly by trying to remove uncertainty and experimentation from problems and systems that need both in order to survive.
The Joseph Stiglitz Problem: Failure to be penalized for incorrect recommendations which might cause harm to others, which usually goes hand in hand with not having any “skin in the game” with your own project.
Narrative Fallacy: The need to connect disparate facts into a story that’s harmonious with your own internal beliefs.
Thanks for the pointer – I share your caution about Sachs’ enthusiasm for top-down solutions, but I’m always glad to see him weigh in on the macro economy.
Another perspective that’s similar (but not identical) to his message is this:
Keynesians rely heavily on their notion of potential output, while failing to understand that the more important concept is sustainable output. In a credit boom, they ratchet up their potential output estimates roughly alongside observed GDP growth, even as this soars well above what’s truly sustainable. The difference is approximately the malinvestment that occurs in the boom.
And then in the bust, Keynesians insist on forcing demand back to its previous levels, layering on still more malinvestment.
The real challenge, though, is to create an environment that’s conducive to the growth of sustainable output.