Moving Beyond Washington’s Stale Economic Debate

In a recent column in the Huffington Post, INET advisory board member Jeffrey Sachs
made the case that the economic debate in Washington has become “stale”
and politicized - and needs to be reframed. This is poignantly relevant
to INET, as we begin to make headway on helping to create a new
economic paradigm.

Sachs, in his Huffington Post column, takes as a starting point that a recent report issued by the Congressional Budget Office (CBO) declaring the stimulus program a success, is flawed: “Careful readers of the CBO Report,” Sachs writes, “could quickly understand the paradox of the supposed good news and poor economic outcomes.”

The paradox, he continues, has arisen because of the CBO’s reliance on flawed models:

“All the CBO did was to apply assumed fiscal multipliers to the stimulus policies, multipliers not based on observed outcomes but rather on economic models. In other words, the CBO numbers are purely theoretical estimates, not in any way tested or verified by actual outcomes.”

Sachs goes on to say that the debate over the stimulus has become confused, and ultimately, polemic:

“On the Administration’s side and some on the left, the stimulus is defended on crude Keynesian grounds (as in the CBO report) without recognizing that there are much more promising alternatives that would address the economy’s structural needs, instead of a failed attempt to restore the pre-2008 consumption bubble. On the Republican side, there is a far more reckless clamoring for further tax cuts on the vague notion that tax cuts would spur growth and that spending cuts would follow on to offset the tax cuts.

This summation is significant to INET, in that it adds some insight into our big question about the current financial crisis: “Why did so many economists fail to predict the global financial crisis, and so many policymakers mishandle it - while some saw it all coming?” Faulty economic models and the politicizing of the debate were certainly some of the factors that led to the crisis - how do we overcome these obstacles in the future?