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Jeffrey Sachs’ Keynesian man of straw

Ben Chu
john maynard keynes 195x300 Jeffrey Sachs Keynesian man of straw

Simplistic?

A curious critique of Keynesianism from Jeffrey Sachs in the Financial Times today.

Sachs finds fault with all the “simplistic stimulus” measures taken by governments in recent years, from car scrappage schemes, to tax cuts and implies that monetary policy, or “adroit central banking”, would have been enough on its own to deal with the recession.

Better qualified people than me will doubtless take this argument on. But when Sachs says it was a “dubious proposition” that “a short-run fiscal boost would jump-start the economy” he’s surely erecting a straw man.

The Keynesian argument was that a fiscal boost was necessary to halt a perilous downward economic spiral (with interest rates already at virtually zero), not that it would set economies neatly back on the pre-recession growth path and enable us all to return to business as usual as if nothing had happened.

Most Keynesians are just as concerned about excessive private consumption in certain developed nations and mounting sovereign debt as Sachs is. And they want these problems to be addressed over the medium term. Their argument is that in a Keynesian moment – zero interest rates, a collapse in private sector demand – Keynesian stimulus is called for.

UPDATE: I said better qualified people would take on Sachs. And they have. Here’s  Brad DeLong, of UC Berkeley.

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  • bryanmcgrath

    I agree with Sachs that measures such as the car scrappage scheme and Vat reduction are poor “value for money” fiscal stimulus measures. The fig-leaf used to justify the car scrappage scheme was that it was green, in that old fuel inefficient cars would be replaced by modern more efficient vehicles. This was nonsense if only a “back of an envelope” calculation of the energy costs of producing new vehicles against the cost of scrapping vehicles before their useful life was over had been made. However, the powerful motor lobby bullied governments in the G8 to swallow their line. Contrast that with the gas boiler replacement scheme. The scheme replaced inefficient boilers with efficient boilers, but the replacement boilers will last many, many more years than the replacement cars.

    Similarly with Vat reduction, this is a blunderbuss weapon, with no targeted effect at all. In the past governments have built “follies” such as “a bridge to nowhere” in Japan in the name of Keynesianism, however, if the project is not economic then ultimately the final effect will be inflationary.

  • http://profiles.yahoo.com/u/GNHAIZ7SB4353VSHRKB7RI24UI Franli

    Sachs?, the same Jeffrey Sachs mastermind of the Russia miracle to capitalism. that worked out very well by the way.


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