“[One] school of thought ... asks WWJD? What would Jeff do? Jeffrey Sachs has spent more than two decades calling for the U.S. government to spend huge sums on anything that moves, from Bolivia to Poland to Russia to global health to Africa to global warming. But on Wednesday, January 28, 2009, as Davos opened, Sachs suddenly announced that he is now a U.S. deficit hawk.
"Without a sound medium-term fiscal framework, the stimulus package can easily do more harm than good, since the prospect of trillion-dollar-plus deficits as far as the eye can see will weigh heavily on the confidence of consumers and businesses, and thereby undermine even the short-term benefits of the stimulus package."
He sounds like one of those IMF fiscal austerity priests issuing a stern reprimand to some benighted land—like those that prior to Wednesday he derided at every opportunity. But on today's deficit dangers at home, I had to agree with Jeff Sachs for the first time in over a decade.”
William Easterly, "Leaders Go Left, but Economists Get Back to Basics", Forbes.com (30 January 2009).
http://www.forbes.com/2009/01/29/davos-economic-basics-opinions-contributors_0130_william_easterly.html
[LW: Easterly is quoting Jeffrey Sachs, "The stimulus is a fiscal straitjacket", Financial Times (28 January 2009). Years ago, when I was a graduate student, my macroeconomics professor carefully explained the conventional wisdom that budgets ought to be balanced - not every year, but over the business cycle. In other words, government should operate with surpluses in good times, and deficits when the economy is depressed. Republican presidents in the US, beginning with Ronald Reagan, ignored this rule. All were spendthrifts – not fiscally conservative at all. In just 8 years, G.W. Bush managed to increase the US national debt from $5.7 trillion to more than $10 trillion. With current interest rates close to zero, servicing this debt costs taxpayers almost nothing. What worries economists like Jeffrey Sachs and Bill Easterly is the future: the cost of servicing this debt when the economy improves and interest rates increase. This is the sad legacy of fiscal imprudence – it is difficult to apply fiscal stimulus when it is most needed.]
William Easterly is professor of economics, New York University, visiting fellow at The Brookings Institution, author of The White Man’s Burden, a book about development policy, and a former World Bank economist.
Jeffrey Sachs is Professor of Economics and Director of the Earth Institute at Columbia University and a consultant to the Secretary-General of the United Nations on development questions.
Larry is right to call out Republican Presidents on their fiscal imprudence. This is a legacy the blights the record of the Republican Party to this day.
But let us not let the Democrats off so lightly. Deficits under President Carter were large by previous standards and the shrinking deficits and rising surpluses under President Clinton can be traced to a significant decline in defense expenditures associated with the end of the Cold War. Absent the decline in defense, Bill Clinton would have ran a deficit in every year of his presidency. Moreover, deficits do not “belong” to Presidents. They are just as much a creation of Congress as the President. Finally, I would mention that most of the increase in the debt under Bush 43 was incurred the last few months of his Presidency, as the current financial crisis worsened. Again, Congress must be held partly responsible for this development.
Both Easterly and Sachs are right to point out that the trend toward fiscal imprudence has continued under President Obama. The fact is that the world’s central banks have brought so much in the way of Treasury debt that it is most unlikely they will be willing to buy any more in the future, certainly not a present low interest rates. China, the major purchaser of past Treasuries, is now entering a deep slowdown and its economy is extremely fragile anyway. The Chinese banking system is also very, very weak. Even if they, with other foreign countries, are able and willing to fund the U.S. deficit they will insist on much higher interest rates, which will make the deficits extremely expensive to finance in the future.
One would think that policy makers would understand that however difficult our present problems and however bleak the current outlook, it is always easy to make things worse.
The present stimulus package may well do that.
Thanks to Larry Willmore for the Tdj.
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