Mises Wire

Jeffrey Sachs’s Blind Spot

[Building the New American Economy: Smart, Fair, and Sustainable. By Jeffrey D. Sachs. Columbia University Press, 2017. Xx + 130 pages.]

Jeffrey Sachs is no friend of the free market, and I am not known for favorable reviews. It was not to be expected, then, that I would like his new manifesto; and indeed I do not. But one excellent chapter almost redeems the book; and the chief complaint to be made against Sachs is that he fails to apply the lessons of this chapter elsewhere in his analysis.

For almost the entire book, Sachs calls for greater state intervention and planning of the economy. But Chapter 10, “From Guns to Butter,” tells a different story. Here Sachs sounds like Ron Paul or Murray Rothbard, sharply condemning the American Empire.

The United States has a long history of using covert and overt means to overthrow governments deemed to be unfriendly to U.S. interests, following the classic imperial strategy of rule through locally imposed friendly regimes. . .these wars destabilized and impoverished the countries involved rather than settling the politics in America’s favor. The wars of regime change were, with few exceptions, a litany of foreign policy failures. They were extraordinarily costly for the United states itself. (pp. 81, 84)

If America could at one time afford an imperial policy, it can do so no longer. The United States no longer controls as much of the world’s output as it did during the height of the Cold War, so an imperial policy strains its resources in an unacceptable way;

The United States is incurring massive public debt and cutting back on urgent public investments at home in order to sustain a dysfunctional, militarized, and costly foreign policy. ... The United States can vainly continue the neoconservative project of unipolar dominance even as the recent failures and America’s declining economic preeminence guarantee the ultimate failure of the imperial vision. (pp. 85–86)

Unfortunately, Sachs draws the wrong lesson from his withering condemnation of recent American foreign policy. He bemoans the money spent on foreign adventures, wishing instead that it could be spent on the domestic investments he supports. But it seems not to occur to Sachs to wonder: if the State pursues an unprincipled and ineffective foreign policy, why should people trust it to take the correct course domestically? Should not Sachs, even from his point of view, abandon his blind credence in the benefits of “governance”?

Such thoughts do not cross Sachs’s mind. Instead, he calls for the massive growth of the state. We need, he says, more government programs on “infrastructure”: the free market cannot supply the roads, bridges, airports, and new types of power that we require.

The nation’s core infrastructure ... is now at least a half-century old, and much of it is falling into disrepair. ... The chronic underinvestment in infrastructure dates back at least thirty years, essentially since the completion of the interstate highway system. (p. 28)

Do we not have here an extraordinary argument? The decaying infrastructure that occupies Sachs’s attention was the result of government planning. It was the federal government under Eisenhower, not the free market, which mandated the interstate highway system. (The fact that many projects were constructed by private companies does not alter this fundamental point, since they did not stem from market demand.) If the infrastructure is now in disrepair, this reflects the failure of government to amortize its investments in an efficient way. Successful private businesses are well aware of the need for capital replacement. Nevertheless, confronted with the massive failure of government, Sachs calls for more government spending on infrastructure. Would it not be the better course of wisdom to place greater, rather than less, emphasis on the free market in this vital matter?

Sachs appeals to a dubious principle on another issue. He is too good an economist not to recognize the benefits of international trade: “the first major point about expanding U.S. trade with lower-wage countries is that it tends to improve efficiency — enlarge the pie.” There is, however, a drawback: trade tends also “to redistribute the U.S. economic pie toward capital and highly educated workers and away from workers, especially less educated ones.” (p. 55)

Sachs deals with these two tendencies in the expected way: he calls for the government to intervene.

[T]he gains to the winners are usually large enough to compensate the losers. By taxing the gains from trade accruing to the capitalists and highly educated workers, the federal government could transfer some of the expanded “pie” to America’s less educated workers. ... The net result would be that all groups — the capitalists, highly educated workers, and less educated workers — would be better off with more trade, after taking into account the taxes and transfers. (p. 55)

All seems well and good, until we ask a question: why should people be guaranteed that they suffer no decline in their present economic position? The free market is, as Mises again and again insisted, a way in which resources are transferred so that they can best meet the demands of consumers. To guarantee everyone against loss imposes a substantial block to economic efficiency and lacks justification in its own right. We do not, after all, require that domestic businesses that drive out competitors compensate them for the losses, so that the losers emerge unscathed. One suspects that Sachs would not take this as a reductio of his position, but would instead extend the compensation principle.

More generally, Sachs thinks that inequality of wealth and income is a major problem. Even though “in 2016, the census bureau announced a heartening 5 percent gain in the median household income between 2014 and 2015, the largest gain on record,” (p. 37) this does not satisfy our author. There has been a dramatic widening of inequality. Incomes of the poorer groups have stagnated, but “households at or near the top of the income distribution have enjoyed sizable increases in living standards.” (p. 37) Countries like Denmark impose heavier taxes on the rich than we do, and have more and better welfare programs for the poor. Can we not emulate them and do better?

Sachs does not ask why we should do this, but rather takes for granted that inequality is bad. Why is it bad that some earn more than others? It is not self-evident that it is. People usually want more money, and poverty is certainly a bad thing; but it does not follow that it is wrong for some to have vastly more money than others. In the absence of argument for equality, Sachs’s suggestions are no more than attempts to substitute his own preferences for the preferences of consumers, expressed in the free market. Sachs would of course dissent, but even if one agrees with him, we can hardly rely on the state to adopt ethically correct policies. For skepticism about the state’s beneficent role, we have an excellent argument in Sachs’s chapter on foreign policy.

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