Jeffrey Sachs And The Global Economy

I was fortunate to be in the audience at the Harvard Club in New York last week to hear Jeffrey Sachs speak on the current economic crisis and what needs to be done to get us out of he mess in which we find ourselves.

First, in case you don't know who Jeffrey Sachs is, he is a pre-eminent economist, the person that governments call for when they want to do nothing less than, say, revise their financial system.  He's a genius who spent many years at Harvard and now runs a project called The Earth Institute, out of Columbia University, in a partnership with his wife.

I had not heard him before and it was a pleasure.  Not that he had good news.  On the contrary, he clarified just how bad things are.  But he also gave a great deal of hope for resolution and said, near the end of his remarks, that one of the things for which we should all feel fortunate, is that "we now have a grownup for President."  He made it clear he feels President Obama can lead us out of the mess, and that in fact he'll be leading the world out of the mess while he's at it.  Because this economic crisis is global, which distinguishes it from any previous economic crisis in history.

Not unlike Obama, Sachs has a conversational speaking style.  He engages his audience and makes sure we are "with him" as he delves into arcane subjects.  Here's what I took away from his comments:

There are two scenarios that can be used to describe the current situation.  The first scenario views the collapse of demand and consumer spending as a financial disaster that started in Wall Street and became exacerbated by a series of bad financial decisions and poor regulatory systems.  In this scenario, Greenspan plays a big role, starting in the 90's when he eased the tax rates and encouraged tax regulation.  The combination of easy money and growth of what was essentially a "shadow" banking system on Wall Street, allowed for the boom, especially in real estate.  Greenspan said, famously that "there can be no bubble in housing" since people purchase their homes to hold, not to speculate.  In any event, housing peaked, prices weakened, the sub prime mortgages went bad and the downward spiral sped up.  The result" financial calamity, the coup de grace of which was the fall of Lehman. 

In this scenario, the strategy is to unlock credit, clean up the banks, save the biggest ones and find ways to encourage spending (tax cuts?) both in the public sector and at the consumer level. 

But, says Sachs, there is another scenario, the one he believes is the right one.  This one recognizes that the sub prime crisis wasn't big enough to cause the global crisis we are in.  In fact, there has already been an unlocking of credit, but no matching uptick in demand.  So to say that our problems are due now to the banks holding back is unproven and suspect.  Loans are available but no one wants them.  Sachs equates this situation with that of Japan's "lost decade" when people saved their money and the economy was essentially stagnant.  There is a lesson there, says Sachs, with significant implications. 

 

Throw in Keynes' theory known as the Paradox of Thrift.  This theory says that you can't save yourselves out of financial trouble.  And because people are inclined to simply sit on their meager pools of cash--and the government does the same--you become worse off.  Sachs urges us to what he calls the "Benefits of Thrift" theory, i.e. that it is probably a good thing for this country to spend less.  Consumers and companies had become short sighted and were spending way beyond our means.  Sachs argues that we should spend not on more consumer products, which we don't need, but as a country, to spend on big projects: set up the appropriate power structure that we need; invest in bio-chemistry and other means to create innovative solutions to energy and climate problems.  And educate our citizens because we need a smart citizenry to compete globally.

         

There is lots more to what Sachs said.  Perhaps I can share more later.  But for now, let me assure you, his comments have been the basis for heated conversation in our company and among friends.  What's especially interesting is to see how much Obama's message to Congress channeled Sachs in his interest to inveest heavily in long term future-focused projects.  My guess is that Sachs sat at his television screen and said "Yeeeeessssss!"