In a remarkable column published in today’s Financial Times, Jeffrey Sachs exhibits a fundamental reversal of his economic thinking. Until now, one of the foremost disciples of John Maynard Keynes, he openly and categorically rejects that doctrine. As one of the foremost skeptics of Austrian economics, he now openly embraces the economic thought of Friedrich von Hayek. I choked on my morning orange juice as I took in the magnitude of this rebirth.
1. Sachs on Keynes
“The rebound of Keynesianism, led in the US by Lawrence Summers…Paul Krugman…and… Ben Bernanke…came with the belief that short-term fiscal and monetary expansion was needed to offset the collapse of the housing market…The US policy choice has been fours years of structural (cyclically adjusted) budget deficits of general government of 7 per cent of gross domestic product or more; interest rates near zero; another call by the White House for stimulus in 2013; and the Fed’s new policy to keep rates near zero until unemployment returns to 6.6 per cent…We can’t know how successful (or otherwise) these policies have been because of the lack of convincing counterfactuals. But we should have serious doubts. The promised jobs recovery has not arrived. Growth has remained sluggish. The US debt-GDP ratio has almost doubled, from about 36 per cent in 2007 to 72 per cent this year. Jeffrey Sachs, ‘We must look beyond Keynes to fix our problems’, Financial Times, December 19, 2012
2. Sachs on Hayek
“the zero interest rate policy has a risk not acknowledged by the Fed: the creation of another bubble. The Fed failed to appreciate that the 2008 bubble was partly caused by its own easy liquidity policies in the preceding six years. Friedrich Hayek was prescient: a surge of excessive liquidity can misdirect investments that lead to boom followed by bust.” Jeffrey Sachs, ‘We must look beyond Keynes to fix our problems’, Financial Times, December 19, 2012
I have no doubt that many readers of this column will also choke on their beverage of choice as they read these born again words of revelation from this former sinner:
Amazing grace, how sweet the sound
That saved a wretch like me.
I once was lost, but now am found.
Was blind, but now, I see.”