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Home » Opinion » Foreign Views

Investing in a sustainable economy

By Jeffrey D. Sachs | November 3, 2014, Monday | Print Edition

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 supply-siders, 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 securitized consumer loans, and more “shovel-ready” infrastructure projects through short-term 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.

Decline of investment

Though policy alternates between supply-side and neo-Keynesian 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 percent of GDP in 1990 to just 20 percent in 2013. In the US, investment spending declined from 23.6 percent of GDP in 1990 to 19.3 percent in 2013, and fell even more markedly in net terms (gross investment excluding capital depreciation). In the European Union, the decline was from 24 percent of GDP in 1990 to 18.1 percent 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. 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.

Veritable strike

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.

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.

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.

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 supply-siders 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.

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 21st century. Investing in a sustainable economy would boost our wellbeing and use our “excess” savings for just the right purposes.

 

Jeffrey D. Sachs is professor of sustainable development, professor of health policy and management, and director of the Earth Institute at Columbia University. He is also special adviser to the United Nations Secretary-General on the Millennium Development Goals. Copyright: Project Syndicate 1995-2014.

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