Jeffrey Sachs makes a Case for Bigger Government

Jeffrey Sachs is an interesting figure in the world of economics. Besides doctoring around on the economies of Bolivia and Russia, he is responsible for the “Sachs Plan” that has been imposed on Poland in 1990. He basically pushed a young and insecure democratic government into extreme measures of deregulation and privatization, in an example of economic “Shock therapy”. It is hard to say exactly how that could happen to a government that had essentially directly emerged out of a labor union and was as far left as can be, but he seems to have assured the struggling country would obtain substantial financial support from the IMF, which then however was never provided.

After his plan was put into place basically overnight, food prices soared, unemployment rose sharply resulting in strikes and demonstrations all over the country by a population who felt betrayed. In the first two years, Poland saw 30% reduction in industrial production. People were eventually sufficiently fed up with the experiment and the government had to cut back on its plans. Today, Poland is doing economically reasonably well, I am tempted to say despite not because of Sachs' help. Poland's unemployment rate though is still the highest in the European Union. What is most dramatic indicator of the change that Poland had to swallow: from 1989 to 2003 the number of Poles who lived below the poverty line increased from 15% to 59% [1]. I am far from being a supporter of communism and think the transition was a good development, but it could have been done in a better way, more sustainable and less painful.

I was thus pleasantly surprised that Jeffrey Sachs' recent book “Common Wealth” is a very reasonable and moderate account on economic and political development that assigns a place to government and is respectful towards other culture's preferences towards regulation and social welfare. It is nowhere close to free-market radicalism or advocating the need for shock therapy. Jeffrey Sachs has an essay in the current issue of Time Magazine (Jan 19 2009 p. 34-6) titled “The Case for Bigger Government” which reflects this respect towards the role of government even stronger. He writes:

“Even as our economy worsened, many Americans consoled themselves with the belief that at lest we were better off than people in other rich nations. No more. When you compare the U.S. with Canada, Western Europe and Japan, the news is sobering. Our child-poverty and infant mortality rates are the highest, our life expectancy is the lowers, our budget deficit as a share of gross domestic product (GDP) is the highest, and our 15-year-olds rank among the lowest on tests of math and science [...]”

One could add that in the USA “The national direct estimates of the percentages of adults lacking Basic Prose Literacy Skills are 14.5 percent for the 2003 National Assessment of Adult Literacy.” In other words, about one out of seven Americans can't read. Sachs continues:

“A pressing example: our mostly private health system, at $8,000 per American, is twice the cost of Europe's mostly public system, yet with worse outcome. And nearly 50 million Americans lack health insurance [...]

As our budget choices were getting tougher in the 1970s, Europe faced similar dilemmas and took a different course. While Americans rejected new taxes and new domestic programs, Europeans elected governments that introduced higher taxation, many value-added taxes, to cover the rising costs of health care, education, infrastructure, poverty relief and international-development aid. Ultimately, the Europeans restrained excessive growth in the welfare state in order to maintain global competitiveness and rebalance their economies and succeeded in sustaining the public-private partnerships and welfare-state benefits.

The European strategy, with levels of taxation and government spending roughly 8% to 10% of GDP higher than in the U.S., has many successes to show for it: less costly and more reliable healthcare, the elimination of hard-core poverty, solid educational achievements, and social services that ensure better care for children and more flexibility for mothers and the elderly.”

He finishes by pointing out there won't be one solution for everybody but that different countries will prefer different balances, depending on their social, cultural and historical context:

“The U.S. will not mimic Europe for many reasons - size, diversity, tradition and, of course, vested interests - but we an learn from Europe. Most important, we can see how government can be a partner of the private sector, not an enemy. The time has arrived to restore national prosperity and security with a smartly rebalanced partnership between the public and private sectors.”

I would then hope that similarly the Europeans acknowledge they can learn from the USA, to begin with how to mobilize their citizens to politically participate and to identify with the Union.

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[1] Numbers: Naomi Klein, “The Shock Doctrine”, p. 230 and references therein.