Jeffrey Sachs: How to stimulate the economy

Columbia University economist Jeffrey Sachs criticizes the Democratic and Republican ideas for stimulating the economy:

Following a Keynesian approach, the Obama administration has focused on restoring consumer spending. They have gone about this with a combination of near-zero interest rates, massive Fed financing of mortgages and various consumption incentives, such as rebates for new homebuyers and cash for clunkers.

During the previous bubble, the US consumer was encouraged to over-borrow. Recreating a new bubble is like offering just one more drink, on the government’s account, to overcome a mass hangover. ...

The Republican alternative is equally fatuous. For every problem there is a single Republican answer: tax cuts.

What does Dr. Sachs propose as an alternative?

There are three parts of a long-term solution. The first is to promote greater exports, partly through dollar depreciation and partly through expanded government support for export financing, for example extended to credit-constrained low-income countries that want to purchase US-produced technology. ...

A second component is a massive expansion of education spending and job training. The unemployment rate among college graduates is only 4.7 per cent, while it is 15.5 per cent among those without a high-school diploma. The US woefully under-invests in education outlays for the poor, who drop out of school and then cannot find gainful employment.

A massive expansion of education and training would address the current unemployment crisis in three ways: by shrinking the numbers of young people searching for work, by building job skills for the future, and by increasing total spending in the economy through education outlays.

The third component is to spur an investment boom in areas of high social return that are currently blocked by the lack of clear policies. The conversion to a low-carbon economy would create jobs in the short run, a more productive economy in the medium run, and US technological leadership in the longer run.

The same is true with the overhaul of America’s ageing infrastructure at a time when cutting-edge technologies can dramatically improve the efficiency of resource use, the safety of the built environment, and the sustainability of our ecosystems.

I'll let readers decide, but it seems to me that one of the most respected economists in the world agrees with me that education and infrastructure spending make for good economic stimulus, while the home buyer tax credit and cash for clunkers do not.

Again, education and infrastructure spending stimulate the economy in the short run and promote long-term economic growth because they add to our country's stock of capital (both human and physical). On the other hand, the home buyer tax credit and cash for clunkers may stimulate the economy in the short run, but they subtract from long-term economic growth.