Posted by: Dirk | December 21, 2012

Jeffrey Sachs: we need to think about the long-run

Jeffrey Sachses article Today’s challenges go beyond Keynes appeared in the FT yesterday as part of the A list. He should be removed.

The crisis in southern Europe is often claimed by Keynesians to be the consequence of fiscal austerity, yet its primary cause is the countries’ and eurozone’s unresolved banking crises.

Well, the Icelanders fixed their banking crisis and they grow at 3%. European periphery was given austerity instead of a resolution of their – or better, our European – bank problems. I do not know any Keynesian who says that the crisis is caused by austerity alone. Jeffrey Sachs attacks an unidentified straw man – again.

Trillions of dollars of public and private investments are held up for lack of a strategy. The Keynesian approach is ill-suited to this kind of sustained economic management, which needs to be on a timescale of 10-20 years, involving co-operation between public and private investments, and national and local governments.

Well, ask Greeks, the Irish or the Spaniards about their trillions or maybe tens of billions of euros of public and private investment held up for lack of strategy. Without solving the business cycle problem – which is a full-grown depression in both Greece and Spain – you will not be able to invest into anything. Or take Japan: Keynesian demand management has been the order since the middle of the 1990s, for 10-20 years now. Today in another article Jeffrey Sachs calls for an expansionary monetary policy in Japan:

It’s time for an expansionary monetary policy in Japan (and in other parts of Asia), even if the Yen weakens, as is likely (especially against the Euro, but also against the dollar). Other Asian countries should let their currencies weaken, too. If international trade and financial markets are allowed to operate freely, Japan’s recovery will come faster than in the past decade, benefiting the entire world.

Uh … Japan had a zero interest rate policy from 2001-2006 and here is how it went (the idea was to increase private sector lending in order to increase investment, so that the blue line ‘bank loans’ should move up if this policy would be successful):


Anyways, how Jeffrey Sachs can point to long run problems at the time of the worst short run problems that developed economies have experienced for the last 70+ years is a mystery to me. What sense does the distinction between short and long run make if you are in a depression with no signs of improvement, as in Spain and Greece? And by the way: the Keynesians he describes are inventions of his mind. The only visible Keynesian in the US debate was Paul Krugman, and he wrote this on his blog in January 2009:

But Mr. Obama’s prescription doesn’t live up to his diagnosis. The economic plan he’s offering isn’t as strong as his language about the economic threat. In fact, it falls well short of what’s needed.

Don’t get me wrong: I agree with many of the problems he sees. What is just strange is that he argues against government spending in the short run while he is in favor of government spending in the long run (“The UK, for example, needs increased infrastructure and education investments, backed by taxes and public tariffs.”). Again, the short run crisis will make a long run impossible if it is not fixed. His last paragraph is pure “money doctor”:

When the world is changing rapidly and consequentially, as it is today, it is misguided to expect a “general theory”. As Hayek once recommended to Keynes, we instead need a tract for our times; one that responds to the new challenges posed by globalisation, climate change and information technology.

Posing himself as a man of the middle, he seeks support of those rooted in the center. Except that Keynes was right and Hayek wrong in the Great Depression. It is not politically correct to say that in the circles of Jeffrey Sachs, it seems. Ideology beats reality.

And by the way: a general theory of a monetary economy should explain monetary crises. There are plenty of models. And there are some non-Keynesians in this business, too. Gary Gorton’s new book is based on the idea ‘that systemic financial crises all share a common structural cause: they begin as runs on short-term bank debt’ [interview with the FT]. There are many generations of models to explain financial crises, too.

I always thought that what unites economists is the belief that you can develop useful models, or better, a toolbox of models for different situations to help you analyze how the economy – a.k.a. social system – works. To do this in any serious way you have to think about the balance sheets of households, firms (real and financial) and government (plus central bank).



  1. You quote Paul Krugman; he agrees with Obama’s diagnosis but not with the prescription. I think both diagnosis and prescription are wrong or at least questionable.

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