Interview with Jeffrey Sachs: we are in underlying deep crises that need to be addressed

Interview with Jeffrey Sachs: we are in underlying deep crises that need to be addressed

„Vladimir Putin’s invasion of Ukraine has degenerated into a savage war of attrition that each side believes it will win, but which in reality both sides will lose.“ These are your own words. Why do you think that?

I think we’re in a terrible situation that is very dangerous. Lots of people getting killed, of course, tremendous destruction. But there seems to be a big misunderstanding because both sides proclaim, well, we’re winning now if we don’t really know exactly the situation. But I would say that Ukraine is certainly losing. It’s losing people, it’s losing sovereignty. It is facing mass destruction. And from what we can see on the battlefield, Russia is taking more territory in Lugansk and Donyesk. It has captured a lot of territory on the coast of the Black Sea and established that land bridge much talked about with Crimea. I frankly don’t believe the Ukrainian claim that they will push Russia out militarily and force Russia to abandon all of its territorial gains on the battlefield. It seems completely unrealistic to me and Moreover, extraordinarily dangerous for Ukraine because it means a lot more fighting. And of course, the Ukrainian economy is probably in a state of full collapse. We don’t know completely, but the export sector is destroyed, the metallurgy sector is destroyed. The crop harvest is down between a third and a half. So this is a terrible situation. But so far, still with lots of strong talk.

There is a global crisis, not to negotiate is wrong

The more that goes on, the stranger the situation, because I think it’s more likely than not that Russia gains more territory, that the deaths and destruction seem sure to continue. The crisis in Europe is very bad, more generally, not like in Ukraine. But still, this is a sharp economic crisis, and that’s true worldwide. So I don’t see any end game other than getting back to the negotiating table. And that’s why I keep saying that the US gave bad advice, don’t negotiate. The US failed to discuss with Putin real issues, the most important of which was NATO enlargement to Ukraine, which if I were a Russian leader, I would also oppose. So that needed to be discussed at least. And Biden said, no, we don’t discuss it. So to me, it doesn’t add up what’s happening right now to any kind of sound strategy. It just seems to me to be misguided and dangerous.

And how will the conflict affect the developing countries which depend on food and energy imports?

We know that the whole world economy is suffering from this, especially fooddependent poor countries. I was in Egypt recently, which buys a tremendous amount of grain from Ukraine. Bread prices have soared, but that’s the staple food. And that’s true in many countries in Africa, which are grain importing countries. It’s true of poor people everywhere. It’s also true in Europe and the United States that while it’s not as desperate as in poor countries, prices have risen sharply and this is creating a lot of distress. It’s also creating a deep political crisis for many governments, including in the United States, because Biden’s popularity continues to fall. Excuse me, it reached the lowest levels just now, 36% approval. I don’t approve of his performance. I think that he missed the chances for a peaceful outcome of this, but I am basing that on policies. Many people in the United States just see prices going up and they don’t like it. And that’s true of a lot of governments. That’s going to be true in Europe as well.

Putin’s defeat is not very realistic

We need a better strategy than just declarations of defeating Putin. That’s not a strategy. It’s not very realistic, by the way, not to mention, if it were realistic that Putin would be defeated by the American armaments, I’m quite sure that he would escalate.

And if he were still pushed to a corner, the chance of using nuclear weapons in Ukraine would be very real. So even the idea of defeating a nuclear superpower this way strikes me as a very weird, strange idea. Is anybody thinking in my government, in the US? I’m not so sure anybody’s really thinking very hard.

You are an advisor of Mr. Guteresse, UN secretary general. Does the UN has some power to solve conflict between Ukraine and Russia.

First, let me say that I’m an advisor on the sustainable development goals and on the economy, not on the military or security issues. So I just want to be clear about that. But the UN was established to keep the peace and to return to peace. So I believe that it is the assignment of the UN Charter, especially to the UN Security Council, to meet, deliberate and solve this problem. Now many people say, especially in the United States, oh, that’s ridiculous. Putin is a member of the Security Council. My answer is yes, precisely. This is why we need discussion, because we have it in our heads and it’s a bad idea. It relates actually to the Czech Republic in history. Of course, we have it in our heads. We shouldn’t even discuss with Russia. The diplomats don’t even meet. And you know, everything always refers back to Munich and Chamberlain met with Hitler and of course, conceded the Sudatan Land, Northern Bohemia to Hitler. And the lesson that was taken from that is don’t talk, because that’s appeasement to my mind. This is not the right lesson at all. Of course, one needs to be accurate in any negotiations.

One needs not to accept what Putin says straight out. Of course not. One doesn’t need to say, oh, you say it, therefore we agree, but you need to negotiate and you need to discuss. And the idea, by the way, that the situation today is the same as 1938 is also wrong. Each history has its own specifics, and each history needs to be looked at more seriously. Not just a slogan to say, well, look at Munich, therefore, we don’t talk because the situation here is more complicated.

The US has provoked in the Black Sea region

The situation here really does involve a lot of US intervention in the Black Sea region over the years that were provocative. Why, for example, did the United States push for NATO to expand to Georgia as well as Ukraine? Already back in 2008, the Russians were horrified at that idea. Nato is supposed to be a defensive alliance. Why is it moving ever eastward already into the Black Sea with Bulgaria, Romania and then invitation to Ukraine and invitations in Georgia, for heaven’s sake? Well, I think Russia’s answer was you’re trying to encircle us in the Black Sea. And if you look at a map, you can understand Russia’s attitude.

And if you think back to long history, like the Crimean War, back from 1853 to 1856, the west came in to try to kick Russia out of the Black Sea. It took over Selvestapole. Well, there are long memories of this. So we should not be so provocative. We should be trying to find a modus Vivendi, not trying to continue to enlarge the military alliance. This is my problem that we didn’t even try constructively to find real solutions.

Let’s move on to the economy. In the United States and in many European countries, including our Czech Republic, prices are rising sharply. Many politicians, including President Biden, for example, link this to the war and refer to the rise as “Putin’s inflation.” What do you think about it?

Well, I came into economics as a scholar 41 years ago, 42 years ago, working on the problem of stagflation, because in the we also had the situation not unlike today, oil prices were soaring and there was high inflation, there was economic downturn, and there were a lot of similarities because we find that the underlying causes are several. Definitely the war is part of this, but so has geopolitics. The US sanctions amplified the direct effects of the war. Definitely. And Europe by saying, well, we won’t buy Russian oil or we won’t buy Russian gas. Further, raise the price. But then on top of that, we had the Pandemic, which was also destabilizing because it disrupted global supply chains.

The US are afraid of China

On top of that, we have the US trade war with China because the US is hostile to China. And by the way, that trade war was not started by China. It was started by the United States because the US is afraid of China. I’m not afraid of China. I go to China all the time, but the US is afraid that China is too successful. I find this kind of psychoanalytic neurosis, I would say more than an economic phenomenon because the US doesn’t like to have rival countries, but China has become successful and a kind of rival.

And so the US is very worried. But the point is that the US is cutting all sorts of trade relations with China. And that also exacerbates the inflation. The US put on tariffs on Chinese goods, but it did stop a lot of Chinese production, for example, of low cost electronics, by creating a boycott on the export from all the world of higher end semiconductors. But then on top of all of this is the monetary policy of the last ten years.

FEDs mistakes

And this is like the also the Federal Reserve was incredibly expansionary in monetary policy. In fact, unprecedented amount of money creation after 2008, all the way until just recently. The money supply, what we call high powered money, which is the central bank’s money went up about six times. This is extraordinary. If you were in an economics class, you would say that’s crazy. That’s for a homework assignment, that’s not for the real world. But the Fed created so much money and for a long time it didn’t raise prices very much. And they said, oh, we can continue to print money by the debt of our government and nothing’s happening. What was happening was that asset prices were rising, so the money was being used to buy Bitcoin, for example.

Why should something worthless like Bitcoin have such a high market price? Well, because so much money was being printed by the Fed. Also, the stock market rose sharply because people took the liquidity and bought stocks with it. But now that money is finding its way into the real economy, first in general commodities, and now more generally in everything. So the inflation is pretty broad based.

Sources of inflation

So to answer your question, the inflation comes from many things. It comes from the war, it comes from the sanctions, it comes from the covet, it comes from the US trade war on China. And it comes from the central bank policies of the Fed, the European Central Bank, other central banks that were very expansionary and monetary policy and thought that they were doing it without risk of inflation. But it turned out to have long term inflationary consequences. We had, of course, a monetarist economist, mainly in earlier decades. He’s no longer alive. Milton Friedman, who used to say that the effect of money increase was with long and variable lags. In other words, you increase the money supply, it doesn’t immediately turn into prices, but it does with long and variable lags.

And I think that that’s true. So it’s just like when I wrote my dissertation incredibly, 42 years ago, it’s all these factors. And I published a book exactly 40 years ago called The Economics of Worldwide Stagflation, which discussed all of these factors. And now I should come up with the second edition. I think it’s so similar.

A second global recession now seems to be taking place in a single decade. In the past, every great economic crisis has always led to a new economic thinking – Keynesianism responded to the Great Depression, monetarism to stagflation, and so on. Do you see now, today, after the Great Recession of 2007, after the covid crisis, in the light of the current crisis, somewhere the germ of a new school of economics, of a new economic mindset?

Well, first, this crisis could still turn into a bigger and bigger disaster. So we need to solve some basic problems urgently, starting with ending the war, because as long as the war goes on, many more crises can come that can be very dangerous. So it’s hard to predict anything right now. But we should take clear actions to stop things from getting out of hand. We can be sure that there are some underlying deep crises that need to be addressed even after the war is over and even after this pandemic is controlled, because we have an ecological crisis that’s very serious. We have a geopolitical change in the world, with the US losing its dominance and with the rise of China, and now with so much more of a divided world, and we have the ongoing technological changes, especially digitalization artificial intelligence, robotics. This is changing a lot in the economy. So what we can be sure of is that there will be a lot more disruption, a lot more inequality, a lot more uncertainty, a lot more political stress. I recommend that to get out of this, we also need a lot more cooperation globally, because if each country, each society is facing these stresses on their own, the tensions are going to be extremely high.

Whereas if we actually cooperate, for example, to solve the energy transformation or to ensure that the digital world is satisfactory for us and not a new divide, and to stop the rising tensions between the US, Russia, China that are breaking the world apart, we could actually go back to what we thought we were doing, which was investing in a better future. We seem to have lost the track that we actually want to make something better, not just stop disaster, but make something better. So I use the phrase sustainable development. That’s the title of my professorship. That is the title of the UN network that I lead, the UN Sustainable Development Solutions Network.

The world needs a new philosophy

It’s my belief that we need a new philosophy in which we are aiming to combine economic, social justice and environmental objectives together, that we are aiming for regional and global cooperation, and that we are not wasting our time and lives on war and on conflicts between systems. So called Biden always talks about that. We’re in some great struggle between democracy and autocracy. I think this is such a wrong way to think about the world. Maybe it’s the way that a 79 year old person brought up on the Cold War thinks about the world.

But young people don’t want to think about the world as a struggle that divides the world. They want to find out how do I have a normal life in the future without conflict and without environmental destruction? And we shouldn’t phrase our challenge as some great struggle of systems. I wish Biden once would give a speech about global cooperation. Why doesn’t he give a speech that says, I want to cooperate with China, not just oppose China, but he doesn’t. So this is why I favor sustainable development as a better approach. It’s cooperative. We’re all in the same situation together. We have similar things to do. But if we’re working together, we’ll actually get them done.

Yeah. Young students. And the question is, what should be the goal of nowadays young economists or the economists at all in this world of crisis? In this situation, what should we do right now?

So first of all, economics should have a purpose, which is to make a better life for people. We don’t say that medical school is just to study disease. We say that medical school is to help make people healthier. So economics should be to make people better off, happier, more fulfilling life. And by the way, that doesn’t just mean higher gross domestic product. It can mean more leisure time, more culture, more study time, more tourism, more exchange of ideas. In other words, we want higher well being. So that’s the first point. We want an economics of well being. By the way, this is how the study of politics got started by Plato and Aristotle in ancient Greece. They didn’t say we just study. When Aristotle wrote the book The Politics, which includes a good discussion of economics too, he didn’t say, this is just to understand. This is to make for well being. And this is our starting point. Second, then we need our students to understand the real challenges in the world today. So our students should understand that how the world is divided between rich and poor. They should understand the ecological challenges. They should understand how technology is changing and requiring different kinds of jobs and different kinds of education for the future.

And they should understand the ways that our national and our international systems, whether it’s markets or government processes or civil society, have their respective roles to play in helping to achieve this betterment. This is not exactly how we teach economics right now. We tend to teach economics both. Your job is to study markets, understand them, run statistical equations, and maybe make some predictions. But if you have ideas about what would be better, leave them to yourself. That’s not the job. You’re to be an economic scientist. But this is like saying to a doctor, if you want to treat people that’s your own business, you should just study disease. This is a wrong idea.

We have to start learning economics differently

So we need to revise how we’re teaching economics. I’m writing a new textbook now on this basis, Macroeconomics for the good, Macroeconomics for Sustainable Development, that really aims at creating new instruments and tools to achieve what we want to achieve. And we have responsibilities. Even the issue of climate change, it’s not very well understood. I know in the Czech Republic and actually almost any place where people produce coal or oil, we don’t want to hear about that. Sometimes but it’s a very serious, real issue and there are good solutions to it and our students should study those, understand them, help to say, okay, here’s what the Czech Republic could do on energy transformation, here’s what the European European Union should do on its European green deal and so forth to really get involved in problem solving.

I called it clinical economics when I studied this in the past and that’s how I’ve tried to be an economist because my wife is a doctor, she’s a clinician. She actually treats patients and makes them better. I was very jealous. I thought, Gee, if only economists could do that. But the skills that you need for that approach are somewhat different from what we teach because if you’re a clinician, you look at the patient and say, how do I help make you better? And you really have in economics, that would mean a policy orientation, but you have to know a lot of specifics about your patient, too.

Mr Sachs, many thanks for this interview.

It’s a pleasure. Thank you for having me these interviews. I really appreciate it.

Jana Bobošíková and Hana Lipovská, 25th May 2022