"Five Points on the Critical State of the Economy"

Jeff Sachs:

5 Points on the Critical State of the Economy, by Jeff Sachs: Here is my general assessment of where we are from an economic point of view, putting the political dynamics mostly aside for the moment. ....

(1) There is no room, nor case, for broad-based personal or corporate income tax cuts or credits or rebates. ... The deficit is hemorrhaging... Despite some ideological claims to the contrary, there will be no scope for sizeable cuts in spending as a percent of GDP... We will ... need increased not decreased taxes. Finally, note that temporary tax cuts are likely to have little stimulus effect, even if they could be afforded;

(2) Immediate and sizeable spending increases in the stimulus package should be directed to a few areas: significant support for our crisis-ridden state and local governments, especially for health (Medicaid), education, and other urgent public services; income support (unemployment, anti-poverty including food stamps and child nutrition); health care coverage for the uninsured (as well as adequate Medicaid funding...); and a significant multi-year rollout of infrastructure of all sorts (roads, rail, other mass transit, ports, water, energy, broadband, etc.)

(3) Future taxes (and revenues as a share of GDP) will have to increase, partly by rolling back the Bush tax cuts..., and partly by introducing new revenues on carbon ... and eventually I believe by introducing a VAT or something similar.

(4) The claim that we should reject infrastructure spending because it rolls out over several years is disastrously wrongheaded. We need a buildup of serious high-return public investments, and we can and should start now. ... The most rapid spending will come from sizeable immediate transfers to state and local governments, to the poor, to those without health insurance, and the start-up of some infrastructure spending, and this initial boost will be enough to "buy time" for a sustained and meaningful growth in infrastructure in later years.

(5) We need a medium-term expenditure framework in which budget and tax policies are presented with a five-year time horizon. In such a medium-term framework, we would have significant deficit spending this year ... but then falling over time by a programmed step-by-step increase in government revenues... The spending side will eventually taper off in certain categories...

Of course, to give the administration its real due, it might be impossible to achieve anything if the opposition proves unmovable to this kind of package, so taking something highly flawed now rather than a better framework that is never enacted (!) would make sense. I regret and worry, however, that we haven't yet had the kind of public discussion about what's really needed ... and how we can get there. I don't really know if it's "now or never." If that's true, let's have the legislation now. It just doesn't feel right to me, however. And I do worry that the tax cuts and coming mega-deficits might well frustrate a subsequent convergence on a more meaningful and sustainable trajectory in the coming months and years.

Finally, this is not meant to be a comprehensive agenda... We need major systemic reforms in health, energy systems, foreign policy, science and technology, and much more, which will have significant budgetary implications, but which requires ample public debate and policy formulation. ...