Plain Sense Economics

Hat tip to U of Oregon prof, Mark Thoma, for pointing to this piece by Jeffrey Sachs in the Financial Times.

Obama Has Lost His Way on Jobs

The Obama administration’s stimulus policies are not well-targeted. The Republican alternatives are even worse. Both sides are missing the key fact: the US economy needs structural change that requires a new set of economic tools.

For my principles of macroeconomics students, here is the context…

The BEA announced an annualized growth in GDP of 3.5% for the third quarter of 2009. What’s not to like about the return of positive changes in GDP? The only cloud over this report is whether the growth is sustainable. There is a fair amount of consensus that much of this growth was due to the federal government stimulus package, including the cash for clunkers program.

The intent of fiscal policy (when faced with a recessionary gap) is to shift aggregate demand to the right, and to some extent prime the pump for more growth after that. We know that fiscal policy is an imperfect policy tool – it is often late in coming, heavily leveraged through the fiscal multiplier, and often a mixture of thoughtful solutions and political foolishness. What it can do, however, is provide a way for the government to be strategic with its investments. Monetary policy gives us less opportunity to help an economy chart a different, better course.

Sachs proposes solutions in three areas:

1. Boost exports – through devaluation of the dollar and financing assistance to “customer” countries who buy our goods.
2. Greater investment in education and training
3. Investment in projects with high social return

We can and should debate these, but the important issue is to do our fiscal policy spending thoughtfully.