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Home Publications Blogs Beat the Press The Strange Attack of Jeffrey Sachs on Paul Krugman

The Strange Attack of Jeffrey Sachs on Paul Krugman

Sunday, 10 March 2013 13:18

In a Huffington Post column today, Jeffrey Sachs picks up where he left off in a co-authored column with Joe Scarborough that appeared in the Post last week. There are two main threads to Sachs' argument. The first is that we would have been much better off with an ambitious public investment agenda than the actual stimulus package that was passed by Congress. The second is that we would have been better doing nothing than getting a stimulus of the sort we got, or even worse, getting a larger stimulus of the same variety.

It is difficult to believe that Sachs thinks he is really quarreling with Krugman on the first point. Krugman has been a vocal advocate of exactly the sort of public investment that Sachs is advocating. (There may be an issue as to how such a stimulus should have been paid for. Sachs is advocating tax increases on the wealthy and a financial transactions tax, as has Krugman. It is not clear whether he thinks these tax increases should have been put in place in 2009 when the economy was collapsing.)

The real point of disagreement is the best route if you don't get a big public investment stimulus. Sachs' position seems to be that the sort of tax cuts and modest spending increases that were part of the Obama stimulus were worse than nothing. He argues that the tax cuts were largely used to pay down debt as was the case of much of the spending, which took the form of transfers like food stamps and unemployment insurance. The net effect then is to raise the debt without providing much boost to the economy.

Sachs' claim does stand at odds with much research on the topic. The standard Keynesian models, used by the Congressional Budget Office and others, showed the stimulus creating in the range of 2-3 million jobs. This view also has been borne out by empirical work on the effect of the stimulus. 

The CBO projections compared with actual growth, which Sachs includes as a table in his piece, don't seem to bear out his story of a failed stimulus. The actual falloff in GDP in 2009 was somewhat more rapid than had been forecast by CBO. This was clearly due to a more severe downturn than CBO had been expecting, as can be seen by looking at the CBO projections at start of the 2009. The stimulus first began to have any effect at all in the 4th month of the year. 


Source: Jeffrey Sachs.

As can be seen, growth in 2010 was actually somewhat better than CBO had predicted. This was the peak year of the stimulus. The stimulus faded off sharply in 2011 and 2012. What the chart suggests is that CBO was grossly over optimistic in its confidence that the economy would recover without stimulus. It seems more than a bit strange to blame the stimulus for the lack of growth two years after virtually all the spending and tax cuts had ended.

As far as Sachs' concern that people would save rather than spend their tax breaks and unemployment insurance checks, this does not seem to be supported by the data. The savings rate over the 2010-2012 period averaged less than 5.0 percent. This compares to an average saving rates before the wealth effect of the stock and housing bubbles began to depress it of more than 8.0 percent. That suggests that consumers were not on average paying down debt to any great extent.

Again the problem of the debt or the effort to enlist Keynes as ally seem perverse in the extreme. Taking a segment from my comment on the Post piece:

The last admonition seems especially inappropriate since the United Kingdom's public debt was well over 100 percent of GDP when Keynes was advocating deficit spending in the 1920s and 1930s. As far as the burden of debt, it is worth noting that interest on the debt is near a post war low measured as a share of GDP. This is because the financial markets do not share the concerns of Scarborough and Sachs and are willing to lend large amounts of money to the United States at very low interest rates. This means that we are seeing very little burden from the debt.

Furthermore, even if we follow the deficit path projected by CBO, interest payments measured as a share of GDP will just be back to their Bush I era levels in a decade. That is not a trivial drain on the Treasury, but it is small compared to the loss of $1 trillion in output we are seeing each year, along with the lives devastated by the prospect of years of unemployment.

Also, if S&S are concerned about the measure of debt, then we can easily make them happy by simply buying back debt at a discount when higher interest rates cause bond prices to fall. Any bond calculator will show that the price of the long-term bonds issued today at record low interest rates will plummet when interest rates rise, as is generally projected. (Certainly as predicted by S&S.)

If we buy these bonds back at 50 to 80 cents on the dollar in three or four years, we can shave hundreds of billions, possibly trillions off of our debt. This would be a pointless exercise since it would leave our interest payments unchanged, but it should appease the gods of people who worship debt to GDP ratios (a group that apparently includes S&S).

If we want to limit the amount of interest that is paid out to our children (interest payments are redistributional within a generation, not between generations) then we can have the Fed continue to hold much of the debt. Currently half of what we pay out in interest is refunded by the Fed each year. Congress could instruct the Fed to continue to hold its bonds and tighten up monetary policy through raising reserve requirements. Jeffrey Sachs knows this. (Foreign debt is an issue, but that is the result of the trade deficit, which is in turn the result of an over-valued dollar. If the value of the dollar does not change, cutting the deficit will not affect the nation's indebtedness to foreigners, except insofar as it lower imports by reducing GDP.)

It is just difficult to see the case for the horror story of the debt that Sachs wants to portray. The markets clearly do not see the problem or they would not be lending the government huge amounts of debt at very low interest rates. Furthermore, we know many examples of other countries, or the U.S. at other times, that have been able to have much larger debt to GDP ratios without any notable problem borrowing money.

There is one other point where Sachs is clearly wrong:

"The CBO also suggests that much of the slowdown in GDP growth after 2002 is the result of a slowdown in the growth of potential GDP. According to CBO, potential GDP growth was 3.1 percent per year during 1991-2001, but slowed to just 2.2 percent per year during 2002-2012.

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."

The main reason for the projected slowdown in potential GDP is the slowing of labor force growth. This is partly the result of the retirement of the baby boom cohort and in part the end of the period in which women were entering the labor force in large numbers. Neither development poses a crisis in any obvious way or suggests a structural flaw in the economy.

The story about the decline in demand for low-skilled workers and skill mismatches is not supported by the data. By educational attainment, the group that has seen the smallest decline in their employment to population ratio is workers without high school degrees. These are not the folks we would ordinarily consider to be highly skilled.

More generally, if the economy was suffering from problems of skills mismatch then we should be able to identify large sectors of the economy with a high ratio of job openings to unemployed workers, where wages are rising rapidly and where the length of the average workweek is increasing. While this may be the case in some very narrow sectors or in small regions of the country (by population size), like North Dakota, it is not the case for sectors that could conceivably employ any substantial portion of the unemployed. In short, the skills-mismatch story is still a theory in desperate need of supporting evidence.

To sum up, Sachs seems to have a strong Keynesian public investment position, which is largely in line with Krugman and many other Keynesian economists would like to see. Given that this is not a political possibility for the foreseeable future, Sachs appears to have thrown in with the austerity crowd, seeing some virtue in squeezing the economy by cutting budget deficits.

Comments (13)Add Comment
Agreed completely - why aren't these mutually inclusive?
written by Ashok Rao, March 10, 2013 2:25
I also find a lot of this argument hard to believe, the parts of it that are critical of Krugman at least. Though I think the argument for more infrastructure ought to come from the physical need of better grids etc. not the economics. which I find damning.

I have more detailed thoughts here, if you're interested: http://ashokarao.com/2013/03/1...nvestment/
written by John Q, March 10, 2013 4:19
Mark Thoma has a detailed deconstruction of Sachs's article.
written by RZ0, March 10, 2013 4:45
The idea that people can save their unemployment check is one big joke. When you lose your job, you move to COBRA coverage. The unemployment check is less than the coverage. So even if you have no mortgage and don't eat, your unemployment check is gone the moment you receive it.
Just more loser liberalism.
written by Perplexed, March 10, 2013 5:18
Why do we continue to tolerate these "fear of crushing interest payment in the future" arguments so economists don't have to violate their taboo on discussing wealth taxes? If economists would simply point out that (in addition to the redeeming bonds option) "We The People" have the authority to implement wealth taxes in the event that it becomes necessary to prevent these "crushing interest payments" from bringing the country to a standstill, the fear mongers would stop bringing it up. A public discussion of the "banana republic" level of wealth concentration we have in this country is counterproductive to their objectives for trying to turn the debts and deficits into our main concern, so they'll avoid it at all costs. Economists enable them by their absolute enforcement of this taboo. "We" have nearly $60 trillion in wealth and $15 trillion in annual income. We don't really have a money problem, we have a money distribution problem. If the "bond vigilantes" become a serious problem down the line we can always implement wealth taxes to pay the debt down and eliminate the problem. "We the People" have the power to solve these kinds of problems just like the kings of old did. We don't really need to fear a water pistol when we're holding a bazooka. With a wealth Gini in excess of .84 (2007 - probably much worse now), its something that should be at the forefront of our discussions anyway.

Just more loser liberalism. (part 2)
written by Perplexed, March 10, 2013 5:26
Based on 2007 data, the top 1% have almost $20 Trillion; the top 5%, $35 T, and the top 10%, over $42T. (Our entire national debt is less than $15T, pocket change to these folks). This, out of a total of around $57 T (Based on 2007 - before much of the impact of the real estate fraud disaster was accurately recorded). Maybe we should be talking about what policies led to the situation that a wealth tax with a $2m dollar exclusion could pay off a debt the size of the entire annual output of a country of 300 million people while affecting fewer people than would fit in a football stadium; while still leaving them the wealthiest group of that size to have ever existed.

Sachs is correct to point out that Keynes emphasis was on the marginal propensity to consume; I don't know why Krugman discounts this component of what Keynes was saying, it seems Keynes thought it was central. "Whilst, therefore, the enlargement of the functions of government, involved in the task of adjusting to one another the propensity to consume and the inducement to invest, would seem to a nineteenth-century publicist or to a contemporary American financier to be a terrific encroachment on individualism. I defend it, on the contrary, both as the only practicable means of avoiding the destruction of existing economic forms in their entirety and as the condition of the successful functioning of individual initiative." -J. M, Keynes
written by Union Member, March 10, 2013 6:44

Sach seems to have a strong Keynesian public investment position, which is largely in line with Krugman and many other Keynesian economists would like to see. Given that this is not a political possibility for the foreseeable future...

... without Keynes, do we even have a future?
This is not an dispute about economic policy
written by Robert Goodman, March 10, 2013 8:41
Dr. Sachs is trying to make up some lost ground in public discourse and is doing himself harm. Probably not as much harm as he deserves considering the dishonesty of his recent contributions. He is causing some very decent hard working pubic intellectuals to waste their valuable time debunking his screeds.
". . . one other point . . . ."
written by Ellen1910, March 10, 2013 10:03
Where a quotation comes in multiple paragraphs (here, Sachs' quote in two paragraphs), begin each paragraph with quotation marks. Then, close the final paragraph with quotation marks.
written by NWsteve, March 11, 2013 12:40
is it possible that the CBO forecast listed in the table could not "know" the level of public spending that has been and is continuing to be slashed at the State and Local levels? the aggregate of all government employment including all levels is down substantially since 2009. would this suggest that the CBO model needs tweaked? or? thanks.
sorry, "follow-up":
written by NWsteve, March 11, 2013 7:55
not to overstate the obvious:
but: why in the world would Prof. Sachs spend so much of his time and energy MIS-STATING Prof. Krugman's positions?...at their 'level', this seems very counter-productive...clearly: Sachs should accurately state HIS positions, changed or otherwise, with facts and evidence in support...then, where his studies and views diverge from Krugman's ACTUAL beliefs, begin a conversation contrasting their sameness and differences with suggestions presented for the best-course-forward that everyone should be left to consider...at this point, Sach's HuffPost is both vastly incomplete and very disappointing, to wit a non-starter...too bad...
written by liberal, March 11, 2013 8:10
Ellen1910 wrote,

Where a quotation comes in multiple paragraphs (here, Sachs' quote in two paragraphs), begin each paragraph with quotation marks. Then, close the final paragraph with quotation marks.

Completely agree!
Sachs? Aaargh! Sachs = A Biblical Plague.
written by Calgacus, March 11, 2013 4:39
Naomi Klein has Sachs's number. (As do Ed Herman, Doug Henwood, Matias Vernengo and Mark Thoma) A Boy Scout in whose wake destruction follows, wherever he goes.

He argues that the tax cuts were largely used to pay down debt as was the case of much of the spending, which took the form of transfers like food stamps and unemployment insurance. The net effect then is to raise the debt without providing much boost to the economy.

Food stamps and unemployment insurance are not a transfer in an economy where there is unemployment. They are a free lunch to the economy. And even if the money = government debt were used to pay off private debts - this is a bad thing how? Thinking that there is not much benefit to the economy if people are able to eat (food stamps) and survive after a fashion (UI) - is insane. Confusing imperfect abstract measures of the economy with what having a monetary production economy is FOR.

Idiocies like Sachs's It was the Fed, not the fiscal stimulus, which prevented a fall into depression. are just standard innumerate neoliberal, neoclassical, monetarist, Treasury View, commodity-money utterly-alien-to-empirical-correspondence-and-logical-coherence propaganda trash. Dean should be tougher on this creep.
written by Robert Tartell, March 11, 2013 8:27
How glib is Sachs' talking about the "standard Keynesian model. When this model was adopted here for the first time by FDR, it was broadly reported as "pump priming." If that were not soothing enough, FDR crooned to the American public in a series of Fireside Radio chats that the new debt was not a problem- "We simply owe it to ourselves."
$16 trillion in the hole later, and China holding over a trillion of that debt (and to think that in FDR's day, mothers were imploring their children to eat their squash "because people in China are starving")the "standard Keynesian model" lies like Ozymandias, in ruins. The placque by gthe ruins reads "Every dollar of deficit spending counted as a dolar of GDP"

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.