Governments are not driving investment.
Instead, they are cutting back, creating a lack of public investment that is
holding back critical private investments
Jeffrey Sachs is a professor of sustain able development
and health policy and management, as well as director of the Earth Institute at
Columbia University. He is also special adviser to the UN secretary-general on
the Millennium Development Goals.
Two schools of thought tend to dominate
today’s economic debates. According to free-market economists, governments
should cut taxes, reduce regulations, reform labor laws and then get out of the
way to let consumers consume and producers create jobs. According to Keynesian
economics, governments should boost total demand through quantitative easing
and fiscal stimulus. Neither approach is delivering good results. New
“sustainable development economics” are needed, with governments promoting new
types of investments.
Free-market economics leads to great
outcomes for the rich, but pretty miserable outcomes for everyone else. Governments
in the US and parts of Europe are cutting back on social spending, job
creation, infrastructure investment and job training because the rich bosses
who pay for politicians’ election campaigns are doing very well for themselves,
even as the societies around them are crumbling.
Keynesian solutions — easy money and large
budget deficits — have also fallen far short of their promised results. Many
governments tried stimulus spending after the 2008 financial crisis. After all,
most politicians love to spend money they do not have. The short-term boost
failed in two big ways.
First, governments’ debt soared and their
credit ratings plummeted. Even the US lost its “AAA” standing.
Second, the private sector did not respond
by increasing business investment and hiring enough new workers. Instead,
companies hoarded vast cash reserves, mainly in tax-free offshore accounts.
The problem with both free-market and
Keynesian economics is that they misunderstand the nature of modern investment.
Both schools believe that investment is led by the private sector either
because taxes and regulations are low (in the free-market model) or because
aggregate demand is high (in the Keynesian model).
Yet private-sector investment today depends
on investment by the public sector. This age is defined by this complementarity.
Unless the public sector invests wisely, the private sector will continue to
hoard its funds or return them to shareholders in the forms of dividends or buybacks.
The key is to reflect on six kinds of capital
goods: business capital, infrastructure, human capital, intellectual capital,
natural capital and social capital. All of these are productive, but each has a
distinctive role.
Business capital includes private companies’
factories, machines, transport equipment and. information systems.
Infrastructure includes roads, railways,
power and water systems, fiber optics, pipelines and airports and seaports.
Human capital is the education, skills and
health of the workforce.
Intellectual capital includes society’s core
scientific and technological know-how.
Natural capital is the ecosystems and primary
resources that support agriculture, health and cities.
Social capital is the communal trust that
makes efficient trade, finance and governance possible.
These six forms of capital work in a
complementary way. Business investment without infrastructure and human capital
cannot be profitable. Nor can financial markets work if social capital (trust)
is depleted. Without natural capital (including a safe climate, productive
soils, available water and protection against flooding), the other kinds of
capital are easily lost. And without universal access to public investments in
human capital, societies will succumb to extreme inequalities of income and
wealth.
Investment used to be a far simpler matter.
The key to development was basic education, a network of roads and power, a
functioning port and access to world markets. Today, however, basic public
education is no longer enough; workers need highly specialized skills that come
through vocational training, advanced degrees and apprenticeship programs that
combine public and private funding.
Transport must be smarter than mere
government road building; power grids must reflect the urgent need for low-carbon
electricity; and governments everywhere must invest in new kinds of
intellectual capital to solve unprecedented problems of public health, climate
change, environmental degradation, information systems management and more.
Yet in most countries, governments are not
leading, guiding or even sharing in the investment process. They are cutting
back. Free-market ideologues claim that governments are incapable of productive
investment. Nor do Keynesians think through the kinds of public investments
that are needed; for them, public-sector vacuum and a dearth of public
investments, which in turn holds back necessary private-sector investment.
Governments, in short, need long-term
investment strategies and ways to pay for them. They need to understand much
better how to prioritize road, rail, power and port investments; how to make
investments environmentally sustainable by moving to a low-carbon energy
system; how to train young workers for decent jobs, not only low-wage service-sector
employment; and how to build social capital, in an age when there is little
trust and considerable corruption.
In short, governments need to learn to
think ahead. This, too, runs counter to the economic mainstream. Free-market ideologues
do not want governments to think at all and Keynesians want governments to
think only about the short run, because they take to an extreme John
Maynard Keynes’ famous quip: “In the long
run we are all dead.”
Here’s a thought that is anathema in Washington,
but worthy of reflection. The world’s fastest growing economy, China, relies on
five-year plans for public investment, which is managed by the National
Development and Reform Commission. The US has no such institution, or indeed
any agency investment strategies. However, all countries now need more than
five-year plans; they need 20-year generation-long strategies to build the
skills, infrastructure and low-carbon economy of the 21st century.
The G20 recently took a small step in the
right direction by placing new emphasis on increased infrastructure investment
as a shared responsibility of both the public and private sectors. Much more of
this kind of thinking is needed in the year ahead, as governments next year
negotiate new global agreements on financing for sustainable development (in
Addis Ababa in July);
Sustainable Development Goals (in the US in
September) and climate change (in Paris in December).
These agreements promise to shape humanity’s
future for the better. If they are to succeed, the new “Age of Sustainable
Development” should give rise to a new economics of sustainable development as
well.
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