In short, the US stimulus effects on spending have probably been positive but small, and without a decisive effect on the economy. Moreover, concerns about the enormous US budget deficit, now running at US$1.8 trillion (12 percent of gross national product) per year, are bound to increase, not only creating enormous uncertainties in politics and financial markets, but also dimming consumer confidence as households focus attention on potential future budget cuts and tax increases. The US has reached the practical limits of reliance on short-term stimulus spending, and will need to start cutting the budget deficit and fostering alternative pathways to growth.
When the crisis deepened a year ago, US President Barack Obama introduced into the presidential campaign the theme of a “green recovery,” based on a surge of investment in renewable energies, new electric vehicles, environmentally efficient “green” buildings and ecologically sound agriculture. In the heat of the battle against financial panic, policy attention turned away from that green recovery. Now the US needs to return to this important idea.
Debt-burdened consumers in the US and Europe will limit their spending for years to come as they rebuild their wealth and pension assets. But the resulting economic slack gives us the historic opportunity — and need — to compensate for low consumer spending with increased investment spending on sustainable technologies.
Government policies in the US and other rich countries should stimulate those investments through special incentives. These include a cap-and-trade system for greenhouse-gas emissions, subsidies for research and development on sustainable technologies, feed-in tariffs and regulatory incentives for renewable energy, consumer subsidies and other inducements for the uptake of new “green” technologies and implementation of “green” infrastructure programs, such as mass transit.
The rich world should also provide the poorest countries with grants and low-interest loans to buy sustainable energy technologies, such as solar and geothermal power. Doing so would add to the global recovery, improve long-term environmental sustainability and accelerate economic development.
The crisis can be an opportunity to turn from a path of financial bubbles and excessive consumption to a path of sustainable development. In fact, seizing this opportunity is the only recipe for genuine growth that we have left.
Jeffrey D. Sachs is professor of economics and director of the Earth Institute at Columbia University.
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