Wednesday, September 28, 2011

Why we need permanent larger government

Mr. Sachs begins in an interesting place regarding truly guargantuan government:

One of the common errors of our recent policy debate has been the belief that various studies of the Congressional Budget Office (CBO) "prove" that the stimulus measures have raised employment and output. Careful readers of the CBO reports know that the CBO has proved nothing of the sort. The CBO reports have assumed that the stimulus works, relying on multipliers found in its mathematical models of the US economy. The CBO hasn't in fact re-examined its model for purposes of estimating the impacts of the stimulus policies.

Jeffrey Sachs: A Real Jobs Program (Updated)
Wed, 28 Sep 2011 06:32:03 UTC

Mr. Sachs is correct in that economic models are self-fulfilling. If we look more closely, we find it is worse than that; there is little evidence that the models are re-aligned at all to compensate for differences between projection and reality. How could they? It would render the model even more useless.

Mr. Sachs continues:

There is an even deeper reason for the public's disorientation over Obama's rhetoric. President Obama repeatedly and rightly discusses the longer-term prerequisites for restoring competitiveness: investments in infrastructure, renewable energy, job training, and quality education. Yet these alluring long-term visions are almost completely disconnected from Obama's actual budget policies, which are relentlessly short-term and without strategies beyond a year or two. This disconnect between Obama's soaring rhetoric and lack of long-term plans was on display in the jobs speech this week.

This argument is a version of Republican talking points; that short term fiddling will not solve long term structural issues which are mainly the product of an over-reach of government and Fed monetary policy.

But then Mr. Sachs critiques the other side as well, and he offers the real structural solution:

Obama is right that the Republican vision of relentless tax cuts, deregulation, and shrinking government is the road to ruin. Yet Obama's alternative of short-term and shortsighted stimulus is only marginally better. Neither approach is getting America back on track.

America requires at least a decade of well-designed and well-executed national investments in people, infrastructure, and innovative technologies, in order to boost competitiveness and renovate the economy. Yet such an effort requires serious plans, careful deliberation, and higher taxation on deadbeat corporations and the super-rich. (Obama's endorsement of lowering corporate tax rates in return for ending loopholes augers poorly once again, since it invites yet another gimmicky tax negotiation in the interests of the rich.)

Voila. The government is deeply in debt and is staring at unsustainable deficits due to unfunded social programs. Short term stimulus and conversely, revamping those programs and cutting spending, will not work. No, increased long term structural spending is the answer.

Mr. Sachs is not alone. A few weeks ago, Mr. Humbold argued for much the same thing:

Government Leadership: Here the differences are staggering. In every meeting we attended, with four different customers of our company as well as representatives from four different arms of the Chinese government, our hosts began their presentation with a brief discussion of China's new five-year-plan. This is the 12th five-year plan and it was announced in March 2011.

Robert Herbold: China vs. America: Which Is the Developing Country? -
Wed, 28 Sep 2011 06:45:36 UTC

Last year, Mr. McGregor, a past Chairman of the American Chamber of Commerce in China argued in the same vein:

With nearly half of his Cabinet heading to Beijing for the May 24-25 bilateral "strategic and economic dialogue," President Obama should launch such a strategic economic dialogue among ourselves. The time has come for a White House-led, public-private, comprehensive examination of American competitiveness against a clear-eyed view of China's very smart and comprehensive industrial development policies and plans.

James McGregor - Time to rethink U.S.-China trade relations
Wed, 28 Sep 2011 06:51:03 UTC
All three men long for a world in which they can direct hundreds of billions of leveraged dollars to prioritized projects of their choosing by speaking to a few bureaucrats.

Fractured, decentralized, unregulated markets, like most of Main St., is far too messy a place for them. If only we were more like China or France, people like Mr. Sachs could ‘cure’ all that ails us.

His remarks carry extra irony since so little innovation or creative destruction is ascribable to large bureaucracies or institutions, despite the exhorbitant sums we spend on it.

In fact, we struggle to name but a few ground breaking innovations born even of large companies; they buy them from entrepreneurs or fail under the strain of their new competition. Thus is the statism of large bureaucracy, public or private. Would that more business folks of Fortune 100 companies embraced that idea with their politics because then Mr. Sachs would have much less to say. Especially about causation issues.

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