Here’s a quick post for this week. Jeffrey Sachs published an interesting article in the Financial Times on June 8, “A farewell to Keynes.” http://www.ft.com/cms/s/0/e7909286-726b-11df-9f82-00144feabdc0.html
Though his title makes it sound one-sided, it is worth reading the whole article because he is very even-handed (in my opinion) in political terms. Sachs is tough on Keynesians since he argues that most of the recent fiscal remedies were useless if not counter-productive. And he gathers up a bunch of evidence that shows how much the world is moving toward fiscal conservatism. While most of us are familiar with the fiscal rectitude being forced on Greece and Spain, Hungary recently jumped in line. Germany also just announced a major reform that promises to put a major crimp in spending, especially on welfare. The G20 nations met recently met and revealed a new position away from fiscal stimulus to fiscal sustainability. The OECD has been preaching both fiscal and monetary restraint. Meanwhile we see reports of the US National Debt approaching 100% of GDP, perhaps in 2011 yet with little discussion of anything but fiscal expansion in the face of worries about a double-dip recession. Many analysts believe the US government is incapable of fiscal restructuring. And plenty of experts keep advising against reversing course. For example, Bernanke explained this week that the FED has no plans to begin increasing interest rates until well into 2011. Others are focusing on deflation – warning that the US has more to worry from deflation – and that underlies their prognosis of continued stimulus. These folks are apparently still on the "Keynes train" with no tearful departure in sight.
What makes Sachs’ article even-handed is his recommendation for what could and should be done in the US to avert a Greek-like sovereign crisis. His main point is critical – he advocates starting fiscal restraint now, though he recommends phasing the changes in over five years. He advocates a supply-side approach to jobs and a sobering recognition that real progress could take many years. While he does not directly ask for more spending, he acknowledges that government must have adequate social policies, investment in education, and green energy. He indicates that the rich will have to pay more in terms of income and wealth taxes.
While Sachs sets out some broad guidelines he is not very specific about how to restructure fiscal policy – how to use spending and taxes so as to create his start now-medium-term plan for reducing government deficits and debt. But what I like is that he readily admits that we must immediately turn from stimulus to fiscal control. I am not sure that the US government believes him – at least not yet. In relative global terms, the US continues to be a flexible economy and a safe haven for assets. This let’s our government leaders continue their bets on stimulus while they stall on fiscal reform. But when the headlines announce we have not made progress on deficits and report debt of 100% of GDP – our relative halo may quickly disappear and it might be too late to heed prudent advice.
From the street point of view: Where did the jobs go? Where did the equity go? Equity as defined as stock value of property value.
ReplyDeleteWhy is there a big cheer when Chinese exports go up? That just means we are buying things that we should be producing some of ourselves.
How long can the US keep spending without fiscal restraint and also remain a service economy with a large portion of the population getting ready to take advantage of the entitlement programs for Medicare and Social Security.
How long will we continue to look to the government to solve all of our issues? Was the most recent data correct: 60% of all non farm jobs are with some form of government?
Is it the fourth quarter and the coach has to turn to the bench but they are out of shape and have forgotten how they got there to begin with?
Jim,
ReplyDeleteI can't tell whether your questions are rhetorical or not. Just in case they are not -- here are some very brief answers...
We are in a recession -- jobs and equity always decline in recessions.
China runs on exports. If China has economic problems and political instability -- it would not help us in America. Our administration lashed out at China over their exports -- they are not cheering.
We have been borrowing for decades. We can probably do it a little longer. But my post says this might be coming to an end. The hard way.
I don't have the stats in front of me -- but government jobs are a minor part of the US economy (15%). In May, however, much of the job creation in that month came from temporary Census jobs.
I question whether the players are out of shape or whether the coach is over the hill.
Have a nice weekend.