Jeff Sachs calls for government to set an investment agenda

The world seems to want, and need, plenty of advice on ways to boost macroeconomic performance. I was drawn to one piece on Project Syndicate that was especially interesting because the author, Jeff Sachs (one of the most famous development economists) introduces his comments by saying: “I am a macroeconomist, but I dissent from the profession’s two main schools of thought … the neo-Keynesians, who focus on boosting aggregate demand, and the supply-siders, who focus on cutting taxes. Both schools have tried and failed to overcome the high-income economies’ persistently weak performance in recent years. It is time for a new strategy, one based on sustainable, investment-led growth”.

According to Sachs, the core challenge of macroeconomics is to allocate society’s resources to their best use. Yet most high-income countries – the US, most of Europe, and Japan – are failing to invest adequately or wisely toward future best uses. There are two ways to invest – domestically or internationally – and the world is falling short on both. More infrastructure is needed in both rich and poor countries.

• Investment comes in various forms, including business investment in machinery and buildings; household investment in homes; and government investment in people (education, skills), knowledge (research and development), and infrastructure (transport, power, water, and climate resilience). According to Sachs, the neo-Keynesian approach is to try to boost domestic investment of any sort. Indeed, according to this view, spending is spending. Thus, neo-Keynesians have tried to spur more housing investment through rock-bottom interest rates, more car purchases through consumer loans, and more “shovel-ready” infrastructure projects through short-term stimulus programs. When investment spending does not budge, they recommend that turning “excess” saving into another consumption binge. Supply-siders, by contrast, want to promote private (certainly not public!) investment through more tax cuts and further deregulation. They have tried that on several occasions, but unfortunately, the result of this deregulation was a short-lived housing bubble, not a sustained boom in productive private investment.

Yet Sachs argues that investment is crucial for both the demand side and supply side: there is a significant decline of investment as a share of national income in most high-income countries in recent years. According to IMF data, gross investment spending in these countries has declined from 24.9% of GDP in 1990 to just 20% in 2013. In the US, investment spending declined from 23.6% of GDP in 1990 to 19.3% in 2013. In the European Union, the decline was from 24% of GDP in 1990 to 18.1% in 2013.

Sachs argues that our societies urgently need more investment, particularly to convert heavily polluting, energy-intensive, and high-carbon production into sustainable economies based on the efficient use of natural resources and a shift to low-carbon energy sources. He puts forward a thoughtful agenda.

But just when our societies should be making such investments, the public sectors in the US and Europe are on an “investment strike.” Governments are cutting back public investment in the name of budget balance, and private investors cannot invest robustly and securely in alternative energy when publicly regulated power grids, liability rules, pricing formulas, and national energy policies are uncertain and heavily disputed. Sachs’ conclusion is:

• Governments need to get their act together and make clear public-policy decisions regarding energy systems and infrastructure (as well as the targeted R&D to promote new technologies) that are needed to unleash smart, environmentally sustainable public and private investment spending. They should avoid “gimmicks” (zero interest rates and stimulus packages) and press ahead with detailed national policies that a robust investment recovery will require.

The article contains more specifics and is well worth a read.

Finally, as a development economist, we’re reminded that poor countries are often short of savings: there is also the option of using rich world saving to boost foreign investments. The EU could, for example, lend money to low-income African economies to buy new power plants from EU companies. Such a policy would put EU private saving to important use in fighting global poverty, while strengthening the EU industrial base. Investing in a sustainable economy would dramatically boost our wellbeing and use our “excess” savings for just the right purposes.