Time for a new macroe­co­nomic strat­egy

Financial Mirror (Cyprus) - - FRONT PAGE -

I am a macroe­conomist, but I dis­sent from the pro­fes­sion’s two lead­ing camps in the United States: the neo-Key­ne­sians, who fo­cus on boost­ing ag­gre­gate de­mand, and the sup­plysiders, who fo­cus on cut­ting taxes. Both schools have tried and failed to over­come the high-in­come economies’ per­sis­tently weak per­for­mance in re­cent years. It is time for a new strat­egy, one based on sus­tain­able, in­vest­ment-led growth.

The core chal­lenge of macro­eco­nomics is to al­lo­cate so­ci­ety’s re­sources to their best use. Work­ers who choose to work should find jobs; fac­to­ries should de­ploy their cap­i­tal ef­fi­ciently; and the part of in­come that is saved rather than con­sumed should be in­vested to im­prove fu­ture well­be­ing.

It is on this third chal­lenge that both neo-Key­ne­sians and sup­ply-siders have dropped the ball. Most high-in­come coun­tries – the US, most of Europe, and Ja­pan – are fail­ing to invest ad­e­quately or wisely to­ward fu­ture best uses. There are two ways to invest – do­mes­ti­cally or in­ter­na­tion­ally – and the world is fall­ing short on both.

Do­mes­tic in­vest­ment comes in var­i­ous forms, in­clud­ing business in­vest­ment in ma­chin­ery and build­ings; house­hold in­vest­ment in homes; and gov­ern­ment in­vest­ment in peo­ple (ed­u­ca­tion, skills), knowl­edge (re­search and de­vel­op­ment), and in­fra­struc­ture (trans­port, power, wa­ter, and cli­mate re­silience).

The neo-Key­ne­sian ap­proach is to try to boost do­mes­tic in­vest­ment of any sort. In­deed, ac­cord­ing to this view, spend­ing is spend­ing. Thus, neo-Key­ne­sians have tried to spur more hous­ing in­vest­ment through rock-bot­tom in­ter­est rates, more auto pur­chases through se­cu­ri­tised con­sumer loans, and more “shovel-ready” in­fra­struc­ture projects through short­term stim­u­lus pro­grams. When in­vest­ment spend­ing does not budge, they rec­om­mend that we turn “ex­cess” sav­ing into another con­sump­tion binge.

Sup­ply-siders, by con­trast, want to pro­mote pri­vate (cer­tainly not pub­lic!) in­vest­ment through more tax cuts and fur­ther dereg­u­la­tion. They have tried that on sev­eral oc­ca­sions in the US, most re­cently dur­ing the George W. Bush ad­min­is­tra­tion. Un­for­tu­nately, the re­sult of this dereg­u­la­tion was a short-lived hous­ing bub­ble, not a sus­tained boom in pro­duc­tive pri­vate in­vest­ment.

Though pol­icy al­ter­nates be­tween sup­ply-side and neoKey­ne­sian en­thu­si­asm, the one per­sis­tent re­al­ity is a sig­nif­i­cant de­cline of in­vest­ment as a share of na­tional in­come in most high-in­come coun­tries in re­cent years. Ac­cord­ing to IMF data, gross in­vest­ment spend­ing in th­ese coun­tries has de­clined from 24.9% of GDP in 1990 to just 20% in 2013.

In the US, in­vest­ment spend­ing de­clined from 23.6% of GDP in 1990 to 19.3% in 2013, and fell even more markedly in net terms (gross in­vest­ment ex­clud­ing cap­i­tal de­pre­ci­a­tion). In the Euro­pean Union, the de­cline was from 24% of GDP in 1990 to 18.1% in 2013.

Nei­ther neo-Key­ne­sians nor sup­ply-siders fo­cus on the true reme­dies for this per­sis­tent drop in in­vest­ment spend­ing. Our so­ci­eties ur­gently need more in­vest­ment, par­tic­u­larly to con­vert heav­ily pol­lut­ing, en­ergy-in­ten­sive, and high-car­bon pro­duc­tion into sus­tain­able economies based on the ef­fi­cient use of nat­u­ral re­sources and a shift to low-car­bon en­ergy sources. Such in­vest­ments re­quire com­ple­men­tary steps by the pub­lic and pri­vate sec­tors. The nec­es­sary in­vest­ments in­clude large-scale de­ploy­ment of so­lar and wind power; broader adop­tion of elec­tric trans­port, both pub­lic (buses and trains) and pri­vate (cars); en­ergy-ef­fi­cient build­ings; and power grids to carry re­new­able en­ergy across large dis­tances (say, from the North Sea and North Africa to con­ti­nen­tal Europe, and from Cal­i­for­nia’s Mo­jave Desert to US pop­u­la­tion cen­ters).

But just when our so­ci­eties should be mak­ing such in­vest­ments, the pub­lic sec­tors in the US and Europe are on a ver­i­ta­ble “in­vest­ment strike.” Gov­ern­ments are cut­ting back pub­lic in­vest­ment in the name of bud­get bal­ance, and pri­vate in­vestors can­not invest ro­bustly and se­curely in al­ter­na­tive en­ergy when pub­licly reg­u­lated power grids, li­a­bil­ity rules, pric­ing for­mu­las, and na­tional en­ergy poli­cies are un­cer­tain and heav­ily dis­puted.

In the US, pub­lic in­vest­ment spend­ing has been slashed. Nei­ther the fed­eral gov­ern­ment nor the states have po­lit­i­cal man­dates, fund­ing strate­gies, or long-term plans to catal­yse in­vest­ment in the next gen­er­a­tion of smart, clean tech­nolo­gies.

Both neo-Key­ne­sians and sup­ply-siders have mis­un­der­stood the in­vest­ment paral­y­sis. Neo-Key­ne­sians see in­vest­ments, pub­lic and pri­vate, as merely another kind of ag­gre­gate de­mand.

They ne­glect the pub­lic-pol­icy de­ci­sions re­gard­ing en­ergy sys­tems and in­fra­struc­ture (as well as the tar­geted R&D to pro­mote new tech­nolo­gies) that are needed to un­leash smart, en­vi­ron­men­tally sus­tain­able pub­lic and pri­vate in­vest­ment spend­ing. Thus, they pro­mote gim­micks (zero in­ter­est rates and stim­u­lus pack­ages), rather than press­ing for the de­tailed na­tional poli­cies that a ro­bust in­vest­ment re­cov­ery will re­quire.

The sup­ply-siders, for their part, seem ut­terly obliv­i­ous to the de­pen­dence of pri­vate in­vest­ment on com­ple­men­tary pub­lic in­vest­ment and a clear pol­icy and reg­u­la­tory frame­work. They ad­vo­cate slash­ing gov­ern­ment spend­ing, naively be­liev­ing that the pri­vate sec­tor will some­how mag­i­cally fill the void. But, by cut­ting pub­lic in­vest­ment, they are hin­der­ing pri­vate in­vest­ment.

Pri­vate elec­tric­ity pro­duc­ers, for ex­am­ple, will not invest in large-scale re­new­able en­ergy gen­er­a­tion if the gov­ern­ment does not have long-term cli­mate and en­ergy poli­cies or plans for spurring con­struc­tion of long-dis­tance trans­mis­sion lines to carry new low-car­bon en­ergy sources to pop­u­la­tion cen­ters. Such messy pol­icy de­tails have never much both­ered freemar­ket econ­o­mists.

There is also the op­tion of us­ing do­mes­tic sav­ing to boost for­eign in­vest­ments. The US could, for ex­am­ple, lend money to low-in­come African economies to buy new power plants from US com­pa­nies. Such a pol­icy would put US pri­vate sav­ing to im­por­tant use in fight­ing global poverty, while strength­en­ing the US in­dus­trial base.

Yet here, too, nei­ther the neo-Key­ne­sians nor the sup­plysiders have ex­erted much ef­fort to im­prove the in­sti­tu­tions of de­vel­op­ment fi­nance. In­stead of ad­vis­ing Ja­pan and China to raise their con­sump­tion rates, macroe­conomists would be wiser to en­cour­age th­ese economies to use their high sav­ings to fund not only do­mes­tic but also over­seas in­vest­ments.

Th­ese con­sid­er­a­tions are rea­son­ably clear to any­one con­cerned with the ur­gent need to har­mo­nize eco­nomic growth and en­vi­ron­men­tal sus­tain­abil­ity. Our gen­er­a­tion’s most press­ing chal­lenge is to con­vert the world’s dirty and car­bon-based en­ergy sys­tems and in­fra­struc­ture into clean, smart, and ef­fi­cient sys­tems for the twenty-first cen­tury. In­vest­ing in a sus­tain­able econ­omy would dra­mat­i­cally boost our well­be­ing and use our “ex­cess” sav­ings for just the right pur­poses. Yet this will not hap­pen au­to­mat­i­cally. We need longterm pub­lic-in­vest­ment strate­gies, en­vi­ron­men­tal plan­ning, tech­nol­ogy roadmaps, pub­lic-pri­vate part­ner­ships for new, sus­tain­able tech­nolo­gies, and greater global co­op­er­a­tion. Th­ese tools will cre­ate the new macro­eco­nomics on which our health and pros­per­ity now de­pend.

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