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Adrift on global market currents

Jeffrey Sachs has a column in The Business Spectator noting that a major reason for the economic morass Europe and the US are in is globalisation, and that policy needs to change from tax cuts to tax increases for the rich and increased investment in the future - Adrift on global market currents.

A failure of economic strategy and leadership lies behind the near simultaneous collapse of market confidence in the eurozone and US economies. No need to blame the ratings agencies: governments in Europe and America have been unable to cope with the realities of global capital markets and competition from Asia – and deserve the lion’s share of the blame.



I’ve watched dozens of financial crises up close, and know that success means showing the public a way out that is bold, technically sound and built on social values. Transatlantic leadership is falling short on all counts. Neither the US nor Europe have even properly diagnosed the core problem, namely that both regions are being whipsawed by globalisation.



Jobs for low-skilled workers in manufacturing, and new investments in large swaths of industry, have been lost to international competition. Employment in the US and Europe during the 2000s was held up only by housing construction stoked by low interest rates and reckless deregulation – until the construction bubble collapsed. The path to recovery now lies not in a new housing bubble, but in upgraded skills, increased exports, and public investments in infrastructure and low-carbon energy. Instead, the US and Europe have veered between dead-end, consumption-oriented stimulus packages and austerity without a vision for investment.



Macroeconomic policy has not only failed to create jobs, but also to respond to basic social values too. Let me be clear: good social policy does not mean running big deficits. Public debts are already too large in both Europe and the US. But it does mean a completely different balance between cuts to social services and tax increases on the rich.



The simple fact is that globalisation has not only hit the unskilled hard but has also proved a bonanza for the global super-rich. They have been able to invest in new and highly profitable projects in emerging economies. Meanwhile, as Warren Buffett argued this week, they have been able to convince their home governments to cut tax rates on profits and high incomes in the name of global tax competition. Tax havens have proliferated even as the politicians have occasionally railed against them. In the end the poor are doubly hit, first by global market forces, then by the ability of the rich to park money at low taxes in hideaways around the world.



An improved fiscal policy in the transatlantic economies would therefore be based on three realities. First, it would expand investments in human and infrastructure capital. Second, it would cut wasteful spending, for instance in misguided military engagements in places such as Iraq, Afghanistan, and Yemen. Third, it would balance budgets in the medium-term, in no small part through tax increases on high personal incomes and international corporate profits that are shielded by loopholes and overseas tax havens.