In a recent column in the Huffington Post, INET advisory board member Jeffrey Sachs made the case that the economic debate in Washington has become “stale” and politicized - and needs to be reframed. This is poignantly relevant to INET, as we begin to make headway on helping to create a new economic paradigm.
Sachs, in his Huffington Post column, takes as a starting point that a recent report issued by the Congressional Budget Office (CBO) declaring the stimulus program a success, is flawed: “Careful readers of the CBO Report,” Sachs writes, “could quickly understand the paradox of the supposed good news and poor economic outcomes.”
The paradox, he continues, has arisen because of the CBO’s reliance on flawed models:
“All the CBO did was to apply assumed fiscal multipliers to the stimulus policies, multipliers not based on observed outcomes but rather on economic models. In other words, the CBO numbers are purely theoretical estimates, not in any way tested or verified by actual outcomes.”
Sachs goes on to say that the debate over the stimulus has become confused, and ultimately, polemic:
“On the Administration's side and some on the left, the stimulus is defended on crude Keynesian grounds (as in the CBO report) without recognizing that there are much more promising alternatives that would address the economy's structural needs, instead of a failed attempt to restore the pre-2008 consumption bubble. On the Republican side, there is a far more reckless clamoring for further tax cuts on the vague notion that tax cuts would spur growth and that spending cuts would follow on to offset the tax cuts.
This summation is significant to INET, in that it adds some insight into our big question about the current financial crisis: “Why did so many economists fail to predict the global financial crisis, and so many policymakers mishandle it - while some saw it all coming?” Faulty economic models and the politicizing of the debate were certainly some of the factors that led to the crisis - how do we overcome these obstacles in the future? Go here to read more about the big question, and to add your own insight. Sachs' column is also relevant to our recent question on the Deficit Debate: “Will public deficit reduction encourage private sector growth, or undermine a needed stimulus to recovery & lead to Japan-style stagnation?” Read more on that question here.
You can also give your answers to these and other questions on our Question and Answer forum.
Comments
The deficit discussion is in USA a mixture of an economic debate and a political debate, and both of them with an extremely high dosis of ideology. The political debate and its ideological dosis gained terrain and dominated the economic debate in the past ten months, once that the fears of a possible full scale depression tend to disappear. The economic debate is quite simple. It is dangerous to reduce rapidly fiscal deficits in situations and experiences were private sector recovery has not achieve a firm basis. Even players of financial markets agree on this subject. On the other hand, it is also true that signals must be offered reassuring society and agents that the decision has already been made that in the future, once recovery is in a more firm base, deficits will be reduced. A second subject that deserves great attention is the change in public expenditure composition along time. Here, the real debate is what new projects and programs that are important and appealing for society can be raised and what type of expenditures should be reduced. This will feed the deficit discussion and if it is succesful will serve as an ignition to enhance political support. Even more important, what policies should USA use to foster exports and induce seriously an investment and export led growth in the near future. The deficit may be reduced easily if the shift towards export and investment led growth is fully in practice. It may prove a much more difficult task if nothing is done on this issue.
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