Jeffrey Sachs and Keynesian Economics

Jeff Sachs characterizes himself as a progressive. He wrote this piece on "America's New Progressive Era?" and finished it with this:

Implementation of public policy is just as important to good governance as the vision that underlies it. So the next task is to design wise, innovative, and cost-effective programs to address these challenges. Unfortunately, when it comes to bold and innovative programs to meet critical human needs, America is out of practice. It is time to begin anew, and Obama’s full-throated defense of a progressive vision points the US in the right direction.

I'm certainly on board with that. We need vision, but the government needs to find a practical path to getting things done. Government needs to be wise and innovative. There are elements of American society that are a mess and need to be fixed, and some of that fixing needs to be done by the federal government.

A lot of progressives are Keynesians and, not surprisingly, Jeff Sachs appears to be one too. But Keynesians come in many different types. John Taylor is a Keynesian. Ben Bernanke is a Keynesian. So is Greg Mankiw. There are New Keynesians, like Mike Woodford and Mark Gertler. More than likely, if we could re-animate Keynes, he would have a hard time recognizing his work in any of what those people do.

Though Jeff Sachs is a Keynesian, he views himself as a particular kind of Keynesian, and he has taken issue recently with Keynesians he calls "crude Keynesians." Sachs recently wrote this post, which I found interesting. It's pretty bold, actually, and I agree with most of it. The gist of Sachs's piece is in line with some arguments I have made here. For example read this.

Here are some of the juicy parts of Sachs's post. He says that there are four elements of crude Keynesianism, and that all of those positions are "misguided":

(1) The belief that multipliers on tax cuts and transfers are stable, predictable and large;
(2) The belief that America's employment and growth problems are overwhelmingly cyclical, not structural, and therefore remediable by short-term aggregate demand management;
(3) The belief that a growing debt burden is a minor nuisance as long as the economy is in recession;
(4) The belief that for practical purposes, the most urgent need is to raise aggregate demand rather than to focus on the quality and type of public spending.

Sachs characterizes the problems of the U.S. economy as structural, and not the result of some sort of "aggregate demand deficiency."

What are some of the structural problems? These include large-scale offshoring of jobs, large-scale automation of jobs, decline in demand for low-skilled workers, skill mismatches, broken infrastructure, and rising global energy and food prices. These require various kinds of targeted public investment spending, not simply aggregate demand.

I especially like this one:

The US economic emergency in late 2008 and early 2009 wasn't really an aggregate demand crisis but a financial crisis.

That should be pretty obvious, but many people don't seem to get it.

Predictably, the usual cast of characters is calling Sachs an idiot. Someone should take him out to lunch and give him a pat on the back.