Stimulating Thoughts: Sachs v. Krugman

In this corner, Jeff Sachs, Columbia

For someone with a stunning lack of qualifications, I’ve ventured into thinking about a topic of great interest to any modern society: how to manage (or not) an economy that may (or may not) need Keynesian stimulus. As a lightweight, I’ll limit myself to commenting on a fight between two heavyweights. With an audacity not justified by all of 11 credit of hours of economics as an undergraduate, I posted a reply to a tweet by Professor Jeffrey Sachs of Columbia about economic stimulus. 

In this corner, Paul Krugman, Princeton

Sachs has criticized Professor Paul Krugman’s support of stimulus in general and by the Obama Administration in particular. Conversely, Krugman has criticized the Cameron-Osborne austerity policy in Great Britain. Since 2008, according to Krugman, the most of the world has hit a zero-bound limit of interest rates in the latest economic melt-down (2008) that renders monetary policy—the work of the Fed and other central banks—ineffective. Lower interest rates can’t promote growth because the interest rate has effectively hit zero and there remain an insufficient number of takers to boost demand. Krugman argues that when monetary stimulus can no longer work, then it’s time to roll-out the Keynesian fiscal stimulus. To wit, government should spend more, not less (the austerity position).
(And please, I’m interpreting here, so don’t blame Krugman or Sachs for my mistakes.)

Sachs takes a different position. In the dangerously truncated world of Twitter, he wrote:

@SteveGreenleaf Fiscal policy is problematic as counter-cyclical tool in financial panic. Automatic stabilizers good; beyond that, dubious.

In longer (and therefore more trustworthy statements of his thinking), he’s against fiscal stimulus and Krugman’s position on it.  For instance, from this piece in the Huffington Post dated 9 March 2013 that provides a thorough presentation of Sachs’s position, he writes, “the stimulus packages that began in 2009 --which have consisted mainly of temporary tax cuts and transfer payments -- have significantly raised the public debt while doing very little to solve the nation's long-term employment and growth problems.”

I think that the pivotal point in this is Sachs’s reference to “long-term”. Perhaps he chose this instead of “long-run” because it could too easily come up against Keynes’s statement about “the long-run”:

"In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat again."

(Quotation taken from Matt Yglesia’s writing at Slate.com)

Herein lays the weakness of the Sachs’s position: Yes, the storm will clear and so we don’t need to take any extraordinary measures (beyond “automatic stabilizers”) to right the economic ship. This position has its merits. By way of analogy, when I have lower GI distress (ahem), do I treat it or do I suffer through it? Having been living abroad and traveling since 2012, I’ve had some (but relatively few) incidents, and when I have, I’ve usually let Nature run its course. No Cipro-bombs and only a little of applying the Imodium brakes. This course of benign neglect is one that I think medical authorities agree with. It allows the body to build and use its own defenses and avoids the side effects of any medication. (Any medication is a poison in the wrong dose or taken at the wrong time.) But if I’d gotten sick enough, I have Cipro in my travel kit. The question is one of judgement about when to treat and when to allow the “automatic stabilizers” to do their work without additional aid (not “stimulus” in this case, thank you). I believe that Dr. Keynes would agree to this treatment protocol. However, I believe that Dr. Sachs might be too parsimonious applying any treatment. For instance, in late 2008 and early 2009, we faced much more—at least potentially—than a “financial panic”. Sometimes—albeit rarely—“do something, do anything” has some merit. Thus, I believe that apply “Dr. Keynes’s Patented Fiscal Stimulus Elixir” an appropriate medicine to treat an economy with depressed “animal spirits” (following a manic phase).  

But the medicine of Keynesian fiscal stimulus does include a measure of potential poison. First, it’s subject to abuse. If a drug, it should be a Schedule 1 controlled substance—highly addictive. Politicians love to use it as an excuse the heat up the economy and thereby curry favor with the electorate It acts like a narcotic: a great rush followed by a crash and the desire for more and more. Politicians in an electoral democracy are always attempting to seduce voters (getting voters drunk on an economic high and then . . . well, you get the idea). Thus, we must be very wary about the use of fiscal stimulus. (For a fun look at this way of looking at Keynesian fiscal stimulus, view this video from Russ Roberts of Econ Talk and his buddies.) 

So should we turn this over the economists, the experts? That, too, has its limits. Economists, taken as whole, suffer from excessive hubris and limited thinking. Some have thought—and this more true of the Keynesian-oriented crowd than the Hayekian-Austrian crowd—that the economy could be managed. But the economy is a complex, dynamical system that is subject to influence, but only in limited, uncertain, and contingent ways. The economy is a like an organism that’s constantly changing in response to its local environment as well as evolving over the long-run. (Isn’t “organism” the best metaphor of an economy?) For instance, the world economy of the 1930s is different from the economy of 2015. We have learned some things (and ignored a great deal as well). Thus, as a general rule, I’d keep “Dr. Keynes’ Fiscal Stimulus Elixir” locked in a cabinet marked “Open Only in Case of Emergency”. 

In the end, I think that Krugman and the Obama Administration were right in promoting the use of fiscal stimulus. I don’t think that it hurt us (in the long-run), and we could have done much worse. And while I’m inclined to believe that Great Britain and Europe would have been better without austerity (although their social safety nets are probably better than those of the U.S.), things are improving (at last in Britain) despite any unnecessary pain. Sooner or later, the storm passes. 

Krugman and Sachs as economists have many greater points of significant agreement than significant differences. Both are important voices of progressivism. And while I think it was time in the wake of 2008 to break out the fiscal stimulus medicine, it’s now time to back off of it as a primary concern and focus instead on a long-term plan along that lines that Sachs has outlined. We in the U.S. need significant work on infrastructure and effective social programs. We need to “live within our means” and keep deficits in check. On the issues of climate change and world poverty Sachs has provided a leading voice in addressing these challenges. These issues, , along with limiting the legalized bribery of campaign finance and reducing the crippling economic inequality that can poison our society and politics, should become the focus of our public policy debate. Both of these heavyweights, whom I admire and from whom I’ve learned a great deal, play an important role in framing and forwarding these concerns. So let the debates continue.