The “austerity debate” continues at the Financial Times. Today there is only one contribution, from Columbia University economist Jeffrey Sachs. Professor Sachs agrees there is need for stimulus, but argues that what needs to be stimulated is investment, not consumption.
The striking feature in the current debate about austerity and stimulus has been the lack of attention to investment. Consumers will not provide the engine of recovery, nor should they after overspending for a decade. Instead, the US and Europe should be using the recent corrective boost in saving rates to promote long-term investments in physical and human capital as the proper way back to sustained growth. ….
At a time when China is building hundreds of miles of subway lines, tens of thousands of miles of highways, a couple of dozen nuclear power plants, and a network of tens of thousands of miles of high-speed intercity rail lines, the US struggles to launch a single substantial project. China saves and invests; the US talks, consumes, borrows, and talks some more.
It is wrong in this context to believe that the only choice is further fiscal stimulus versus a repeat of the Great Depression. Further short-term tax cuts or transfers on top of America’s $1,500bn budget deficit are unlikely to do much to boost demand, while they would greatly increase anxieties over future fiscal retrenchment. Households are hunkering down, and many will regard an added transfer payment as a temporary windfall that is best used to pay down debt, not boost spending.
Jeffrey Sachs, “Sow the seeds of long-term growth”, Financial Times, 22 July 2010.
Sachs’ proposal for a “US investment recovery plan” consists of government spending on clean energy and infrastructure and “more education spending at secondary, vocation and bachelor-degree levels”.
Paul Krugman, who works for a rival newspaper, is not participating in the FT debate. Nonetheless, Krugman is clearly in the stimulus camp on this issue. In two blog posts (here and here), Krugman responded to Ken Rogoff’s assertion that there is “No need for a panicked fiscal surge”.
Tags: Paul Krugman
