A NEW MACROECONOMIC STRATEGY / PROJECT SYNDICATE

A New Macroeconomic Strategy

Jeffrey D. Sachs

OCT 23, 2014  




NEW YORK – I am a macroeconomist, but I dissent from the profession’s two leading camps in the United States: 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.

 

The core challenge of macroeconomics is to allocate society’s resources to their best use. Workers who choose to work should find jobs; factories should deploy their capital efficiently; and the part of income that is saved rather than consumed should be invested to improve future wellbeing.

 

It is on this third challenge that both neo-Keynesians and supply-siders have dropped the ball. 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. 

 

Domestic 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).

 

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 auto purchases through securitized consumer loans, and more “shovel-ready” infrastructure projects through short-term stimulus programs. When investment spending does not budge, they recommend that we turn “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 in the US, most recently during the George W. Bush administration. Unfortunately, the result of this deregulation was a short-lived housing bubble, not a sustained boom in productive private investment.

 

Though policy alternates between supply-side and neo-Keynesian enthusiasm, the one persistent reality 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, and fell even more markedly in net terms (gross investment excluding capital depreciation). In the European Union, the decline was from 24% of GDP in 1990 to 18.1% in 2013.

Read more at http://www.project-syndicate.org/commentary/declining-investment-in-rich-countries-by-jeffrey-d-sachs-2014-10#pr02iszLpbAKSFAX.99