Jeffrey Sach's writes a compelling piece in April's Scientific American, a magazine I recently ordered and have been quite enjoying. He suggests that rather than arguing over what kinds of short-term stimulus - tax cuts or spending - produce more real stimulus dollars, we need to take a more systematic long view of our economics.
Infrastructure, for example, shouldn't be invested in because of its ability to produce short-term stimulus. It should be invested in because our infrastructure is crumbling, and has been in hard need of attention for decades. Tax cuts - of course - don't necessarily shore up economic stability in the short term. And, the problem with cuts long term, is that - at least in America - those cuts will need to do a strong about-face in order to compensate for a massive national debt and the forthcoming demographic crisis.
Sachs recommends what he calls a "medium-term fiscal framework" as a way beyond the spending/tax cutting dichotomy: a systematic trade-off of taxation and spending backed up by formal budget projections for at least 5-10 years, if not nearly 50. An example of this, cited by Sachs, is Norway's hydrocarbon wealth program.
Is it time for a new paradigm? Sachs is no fiscal slouch, and his ideas have resonance with me on a few different levels.
Tuesday, March 17, 2009
Needed: A Fiscal Framework
Labels: Economics, finance, Global economy
Posted by Adunare at 11:54 AM
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4 comments:
I was listening to an interview with the chief economist at BMO the other day. Apparently, both the bank and the government (among others) have had to revise their economic forecasts on a surprisingly regular basis. And this forecast is only going ahead the next year or two.
When we talk about projections for 5-10 years into the future, I have a hard time believing this is anything more than an exercise of futility. We simply can't peg the factors that far in advance. When will the recession end? How can we guess when we can't even predict job creation or growth rates?
Part of this ambiguity is structurally in-built, and not every forecast is consumer markets based: Norway's hydrocarbon wealth program is a good example.
Long term economic thinking would have to take seriously coming demographic challenges or huge amounts of long-term debt.
I read a piece recently called out "epistemological fog", and how the market crisis has underscored our fundamental economic illiteracy. We've built a system that almost no one is qualified to understand - and, incredibly, that is one of the most important reasons we have to keep the people at AIG in the game (via bonuses or whatever) because they're the only ones we understand the tangled mess enough to possibly get us out of it. That's not flattering, and that's not ok.
Government doesn't have to overtake markets to be able to facilitate stable, long term investment rules that can be clearly understood. Part of the fear about companies like GM folding - and the reason we throw indiscriminate sums of money at them - is because we don't actually know what is going to happen if they go under. That fear, more than even the actual consequences, drives more policy than I care to think.
Markets are built by human beings. Supply and demand are not omniscient deities that dictate divine terms. We need intelligent human beings at the helm, with capable controls, to put markets again at the service of society, and not the other way around.
5 year plans? Sounds like communism to me. :)
Kidding...well, sort of. I think it's important to distinguish what type of projections need to be made, and how those projections would influence policy. That said, most businesses/gov'ts/organizations do five year projections.
I'm not sure if the problem with the market crash was a case of illiteracy (though yes, granted, there are a lot of people who are financially/economically illiterate; I consider myself barely literate), as much as it is the case of people knowing what would happen and then going ahead to do it anyway.
This seems to be partially aided by a lack of market fences (controls doesn't sound right to me) but that's not wholely that problem. The problem is not that the human beings at the helm were not intelligent, it's that they weren't prudent.
But I still want to suggest the problem isn't always the human beings. As Phil Zimbardo from the infamous Stanford Prison Experiments writes, its not always the case that there are just a few 'bad apples' - sometimes the barrel rots them. Even moral human beings put in broken systems can be capable of terrible acts.
Obviously there is a big structure/agency debate here, but I merely want to suggest it is both/and, not either/or.
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