Email | Print    Type Size  -  +

Sachs (pg. 2)

By Jeffrey D. Sachs, contributor
October 14, 2008: 8:41 AM ET

Some of the excess capacity, however, should be filled not by exports but by increased public and private investment at home. America needs an upgraded infrastructure to stay safe and secure. Yet we've neglected infrastructure for decades. Federal investment in nonmilitary major physical capital has been running a meager 0.2% to 0.3% of GDP in recent years. The results of chronic underinvestment are degraded roads and bridges (ones that actually go somewhere), lagging broadband access in parts of the country, vulnerability to natural hazards, and a dangerously decrepit power grid that is susceptible to disruptions and unequipped to support a modernized energy system.

In fact, the entire U.S. energy system needs an overhaul, both to ensure energy access and national security and to begin the transition to a low-carbon-emission economy to curb rapidly accelerating climate change. Such a massive multitrillion-dollar overhaul will inherently require partnerships between the public and private sectors, the kind of relationship deliberately shunned by the free-market reveries of Reaganomics. The goals of the partnerships should include:

  • The development of mass-market battery-powered autos (hybrid or plug-in) that achieve at least 100 mpg of gasoline on new fleets by the year 2015.
  • An efficient power grid that can carry renewable energy - solar from the Mojave Desert and wind from the Great Plains - to the population centers of the U.S.
  • A utility industry that can reduce 80% of emissions per kilowatt on newly built power plants by 2016, either by recruiting noncarbon sources (wind, solar, nuclear) or by capturing and disposing of the carbon dioxide.

These goals will require hundreds of billions of dollars of public financing for research, development, early demonstration, and the rollout of new technologies, which in turn will leverage trillions of dollars of private capital during the next 20 years.

Now here's the rub, the one that has not even begun to sink in. None of this can be accomplished with the fiscal straitjacket that has been in place since Reagan's first tax cuts in the early 1980s. The mantra of small government and money in the pockets of ordinary Americans has been with us for nearly 30 years now, right through the Clinton era as well. Budgetary revenues have been capped at around 18% of GDP even as the population has aged, health-care costs have soared, and needs from energy to education have been left unattended.


Reaganomics began with wrong diagnosis and a great lie. (In these waning days it depends on even more absurd justifications.) The wrong diagnosis was the belief that the stagflation in the 1970s was caused by too much government, when in fact it was caused by the breakdown of the global fixed-exchange-rate system in the early '70s and by a dramatic tightening of global oil supplies, which led to OPEC's market power. Stagflation was eventually overcome, at high cost, by the combination of Paul Volcker's tight-money policy, investment in energy efficiency, and the development of alternative energy supplies - not by Reagan-era tax cuts. The great lie was to blame the stagflation era's spiraling costs on the infamous "welfare queens" allegedly taking the hard-earned money of America's workers.

This narrative played into the fantasies of a free-market, go-it-alone America, and for some it still does. The absurdities today are that the budget deficit, now at $450 billion and rising, is somehow to be eliminated, according to McCain and Palin, by boldly cutting $18 billion in earmarks and other unidentified waste, fraud, and abuse. That won't get us very far. Such small-government platitudes are especially discordant at a moment when the government is plowing in $700 billion to bail out the financial system.

The true fiscal story is far more dramatic and interesting than the Reaganomics daydreams. Government outlays amount to roughly 21% of GDP, but nearly 17% of GDP is accounted for by a very few areas: the military (4.2% of GDP), health and veterans' affairs (5.4%), retirement and disability, including Social Security (5.4%), and net interest payments (1.7%). Four percent of GDP must now finance all of the following areas: infrastructure, education, housing, nutrition, antipoverty, energy, environment, international affairs, science and technology (including space), agriculture, judiciary, and general administration of government! Of course, this is absurd. It is the end stage of a failed ideology that says that these areas should be left to the private sector. In fact, everyone is awaiting serious government as a partner for business and society. (See chart for these expenditures as a percentage of the federal budget.)

We can't even fund our current minimalist government out of current taxes, and yet we will have to expand government spending by several percent of GDP to face our cascading problems. Today's budget deficit of 3% of GDP will expand to around 5%, but on top of that will be another 3% or so for all the critical needs we will face. From the perspective of five to ten years, even an additional 3% may be too low in view of the vast unfunded liabilities represented by rising costs of health care for an aging society. The idea that our fiscal mess can be addressed with the current tax system is absurd. The McCain-Palin idea of adding still more tax cuts for the rich on top of everything is surreal.

Some fiscal steps are clear. Around 2% of GDP can be recouped by ending the Iraq occupation (costing roughly $140 billion per year in direct outlays) and by cutting some expensive, unnecessary weapons systems. Another 1% of GDP can be recouped by ending the Bush tax cuts for the wealthy, as Obama has suggested. Yet even those steps will leave us with vast and growing needs. We should probably be aiming realistically for outlays and revenues close to 24% of GDP (up by three percentage points in outlays and six percentage points in revenues), compared with the current federal outlays of 21% of GDP.

Where will this money come from? The income tax is pretty much exhausted as an effective source, except to recoup a bit more at the high end, and corporate income taxes are of limited potential in a global world economy where they can be so easily avoided. One good but partial option will be carbon taxation, which might realistically collect 1% of GDP (roughly $25 per ton on six billion tons of emission). The fiscal gap will remain.

Like every other high-income country, the U.S. will finally need a national value-added tax or sales tax of some sort, perhaps starting at a 5% rate (to collect initially around 3% to 5% of GDP). The VAT has proved to be a smart tax, by focusing taxation on consumption rather than on saving and investment. Admittedly, we are nowhere near a public consensus on such issues. Nobody has even bruited such a possibility. Both candidates are promising tax cuts: Obama moderately for the middle class, and McCain recklessly for the rich and for corporations as well.

Yet reality will begin to dawn. Reaganomics is over - even the moderate, triangulating version of the Clinton years. It's time to embrace government again as part of the solution rather than as the source of the problem. And it's time to start paying for government again. Our future, and surely our children's, will depend on it.  To top of page

Company Price Change % Change
Bank of America Corp... 16.15 0.00 0.00%
Facebook Inc 58.94 0.00 0.00%
General Electric Co 26.56 0.00 0.00%
Cisco Systems Inc 23.21 0.00 0.00%
Micron Technology In... 23.91 0.00 0.00%
Data as of Apr 17
Index Last Change % Change
Dow 16,408.54 -16.31 -0.10%
Nasdaq 4,095.52 9.29 0.23%
S&P 500 1,864.85 2.54 0.14%
Treasuries 2.72 0.08 3.19%
Data as of 3:02pm ET
More Galleries
50 years of the Ford Mustang Take a drive down memory lane with our favorite photos of the car through the years. More
Cool cars from the New York Auto Show These are some of the most interesting new models and concept vehicles from the Big Apple's car show. More
8 CEOs who took a pay cut in 2013 Median CEO pay inched up 9% in 2013 to $13.9 million. But not everyone got a bump last year. Here are eight CEOs who missed out. More
Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.