The Price of Civilization

by Jeffrey D. Sachs

  In the modern era, from the European Enlightenment till today, philosophers have continued to speculate about the deep motivations of human action and the ultimate sources of human well-being. Adam Smith’s The Theory of Moral Sentiments remains one of the most acute (and also entertaining) texts on the many motivations of individuals as they are influenced by social dynamics and status. Modern philosophers have emphasized not only what gives happiness but what delivers justice. Revisiting the famous debate between John Rawls’s A Theory of Justice and Robert Nozick’s Anarchy, State, and Utopia remains a very powerful way to reflect on the themes of individual liberty versus social justice and ethical responsibility. Philosopher Peter Singer has added a powerful utilitarian voice to the debate in recent books such as The Life You Can Save. One powerful attempt to bring together the lessons of the ancient sages, the wisdom of the modern philosophers, and the insights of modern psychology is Jonathan Haidt’s The Happiness Hypothesis. This book is sure to stimulate thinking and debate and helped me to wend my way through the long history of human speculations on these crucial topics.

  Economic Underpinnings

  The main economic theme of the book is that the United States has lost the appropriate balance between the market and the government. Economic well-being depends on a mixed economy. Adam Smith knew as much. Readers of The Wealth of Nations (especially Book V) will recall that Smith favored the active role of government in law enforcement, public works, and education, among other areas. The two most influential “small government” texts of the twentieth century, Friedrich Hayek’s The Road to Serfdom and Milton Friedman’s Capitalism and Freedom, are much more frequently quoted than read. This is a shame. Both are well worth reading today, in part to remind readers that even arch—market liberals like Hayek and Friedman believed in government responsibility in the economy, not least to protect the environment, provide infrastructure, and ensure an educated population. On a related note, the German market economist Wilhelm Röpke, in A Humane Economy, brilliantly emphasized the need for moral boundaries to protect human values from the overbearing pressures of the marketplace.

  There has been a flood of books in recent years about what has gone wrong in particular sectors of the American economy as the result of the retreat of government from economic regulation, stabilization, and provision of public goods. The list alone would take several pages just for the blunders in the financial and monetary sectors. William Fleckenstein and Frederick Sheehan scathingly and succinctly document Alan Greenspan’s serial blunders in Greenspan’s Bubbles. Andrew Hacker powerfully addresses the collapse of the social safety net for middle-class Americans in The Great Risk Shift. George Halvorson, CEO of Kaiser Permanente, ably explains the failures of the American health care system in Health Care Will Not Reform Itself. Two leading economists, Claudia Goldin and Lawrence Katz, meticulously document the government sector’s underinvestments in education in The Race Between Education and Technology. The dangers of runaway public debt are thoroughly documented in This Time Is Different, by economists Carmen Reinhart and Kenneth Rogoff, who add a long and fascinating historical perspective to the dangers of budget profligacy.

  The most stunning result of bad public policy has been the surge of income inequality, especially the soaring incomes of the super-rich. Globalization may have initiated the rise of inequality in the 1970s, but deliberate and inequitable government actions to cut top tax rates, deregulate finance, and in general cater to corporate interests have greatly exacerbated the inequalities. Part of the story is the spread of international tax havens used to shelter the incomes of the rich, a story told with uncommon vigor and insight by Nicholas Shaxson in Treasure Islands: Uncovering the Damage of Offshore Banking and Tax Havens. A closely related aspect of the inequality is the surge of CEO take-home pay, made possible by the weak corporate governance of American shareholders and boards of directors. The key reference work on unjustified CEO compensation is Pay Without Performance: The Unfulfilled Promise of Executive Compensation, by Harvard Law School professors Lucian Bebchuk and Jesse Fried.

  Comparative Political Institutions

  As I emphasize throughout the book, Americans will benefit by learning more about market-government choices made by other societies, most notably the successful social democracies of Scandinavia. The greatest analyst of Scandinavian social democracy is sociologist Gøsta Esping-Andersen, whose books include The Three Worlds of Welfare Capitalism and Why We Need a New Welfare State (co-edited). It is also important for Americans to understand U.S. performance on key dimensions (economic, social, and environmental) compared with other high-income countries. The Organisation for Economic Co-operation and Development, the World Economic Forum, Transparency International, and the United Nations Development Programme each offer a multitude of online data and rankings that help countries to benchmark their performance, and which are useful reference points for Americans as they contemplate the options for change.

  American Political Values

  Perhaps my most pleasant surprise in writing this book lay in my reacquaintance with the common sense and decent values of the American people. We are told daily by Fox News that America is a conservative country well represented by the Tea Party movement. The evidence is otherwise. America is a moderate and pragmatic country, with a generous commitment to helping the poor even as most Americans insist that the poor should take the lead in achieving their own economic betterment.

  Political scientists over the years have done an excellent job in describing this “centrist” position. A recent valuable contribution is Benjamin Page and Lawrence Jacobs’s Class War? What Americans Really Think About Economic Inequality. A similar message can be found in Larry Bartels’s Unequal Democracy: The Political Economy of the New Gilded Age. Bartels shows that Americans are moderate even if the politics are extreme, in part because the views of the rich carry a hugely disproportionate weight in Congress. The confusion between what Americans really believe and what we are told they believe is partly the result of deliberate corporate propaganda. There is no better guide to the relentless anti-science assault of major U.S. corporate polluters than the recent study Merchants of Doubt, by Naomi Oreskes and Erik Conway.

  Of course, America’s decent public values are also under threat, because of the loss of confidence in government and the waning of trust among the public. The leading scholar of the shriveling of public trust is the sociologist and political scientist Robert Putnam. Putnam’s masterpiece, Bowling Alone, carefully documents and helps to explain the loss of “social capital” in the United States in recent decades.

  Monitoring the actual values held by Americans, rather than the slanted claims about American values made by pundits and propagandists, has become easier to do through the mass availability of public opinion surveys. In addition to the important survey results from polling firms such as Gallup and Rasmussen, the Pew Research Center for the People & the Press offers a continuing stream of online, first-rate survey data. Another notable monitor of political views is the University of Maryland’s innovative Center on Policy Attitudes.

  The Complexity of Problem Solving

  In my two recent previous books, The End of Poverty and Common Wealth, I emphasized that solutions to complex problems such as those facing America today need to be holistic, adaptive in design, and goal oriented. In short, we need “complex systems thinking” to move forward. There are no magic bullets and few shortcuts to success. The need for systems thinking will probably be most urgent in the near future in addressing the simultaneous challenges of energy security, environmental safety, and economic prosperity. A number of recent books show how to engage in such complex systems thinking about the sustainable development challenge, including Steven Cohen’s Sustainability Management, Peter Calthorpe’s Urbanism in the Age of Climate Change, Charles Weiss and William Bonvillian’s Structuring an Energy Technology Revolution, Lester Brown’s World on the Edge, and William Mitchell and co-authors’ Reinventing the Auto
mobile.

  NOTES

  Part I: The Great Crash

  Chapter 1: Diagnosing America’s Economic Crisis

  1. U.S. Census Bureau, “Current Population Survey: Annual Social and Economic (ASEC) Supplement.” According to the U.S. Census Bureau, there are roughly 44 million people, or 14.3 percent of Americans, who live below the poverty line. Another 60 million people live between the poverty line and two times the poverty line, a zone that may be considered the “shadow” of poverty.

  2. Plato, “Apology,” in Five Dialogues, transl. G.M.A. Grube (Indianapolis: Hackett, 2002), p. 41.

  Chapter 2: Prosperity Lost

  1. Gallup Poll, “In general, are you satisfied or dissatisfied with the way things are going in the United States at this time?,” May 5–8, 2011.

  2. Rasmussen Reports, “Right Direction or Wrong Track,” March 2011.

  3. Rasmussen Reports, “65% Now Hold Populist, or Mainstream, Views,” January 2010.

  4. Robert D. Putnam, Bowling Alone: The Collapse and Revival of American Community (New York: Simon & Schuster, 2002); Robert D. Putnam, “E Pluribus Unum: Diversity and Community in the Twenty-first Century: The 2006 Johan Skytte Prize Lecture,” Scandinavian Political Studies 30, no. 2 (June 2007).

  5. Richard Easterlin, “Does Economic Growth Improve the Human Lot? Some Empirical Evidence,” in Paul A. David and Melvin W. Reder, eds., Nations and Households in Economic Growth: Essays in Honor of Moses Abramovitz (New York: Academic Press, 1974).

  6. Betsey Stevenson and Justin Wolfers, “The Paradox of Declining Female Happiness,” NBER Working Paper Series, No. 14969, May 2009.

  7. Tom Rath and Jim Harter, Wellbeing: The Five Essential Elements, Appendix G: “Wellbeing Around the World” (New York: Gallup Press, 2010). Gallup asked respondents whether they were “thriving,” “struggling,” or “suffering.” The U.S. ranked nineteenth in the proportion of “thriving” respondents, behind Denmark, Finland, Ireland, Norway, Sweden, the Netherlands, Canada, New Zealand, Switzerland, Australia, Spain, Israel, Austria, the United Kingdom, Belgium, Mexico, Panama, the United Arab Emirates, and just ahead of France, Saudi Arabia, Puerto Rico, and Jamaica.

  8. Philip Brickman and Donald Campbell, “Hedonic Relativism and Planning the Good Society,” in M. H. Apley, ed., Adaptation Level Theory: A Symposium (New York: Academic Press, 1971), pp. 287–302.

  9. Data from U.S. Bureau of Labor Statistics, “Employment Situation Summary” and “Overview of BLS Statistics on Employment.”

  As is well known, these unemployment rate figures mask an even larger crisis of underemployment. Millions more workers have dropped out of the labor force altogether because they were unable to find jobs and are therefore no longer counted in the headline unemployment rate (which includes only those actively seeking work). Millions more are on forced part-time work. Adding these two groups to the official unemployment rate suggests a true underemployment rate closer to 20 percent of the adult population. In addition, more than 2 million mostly young men are incarcerated in prisons, out of the labor force the hard way.

  10. Ibid.

  11. For current data, see: U.S. Bureau of Labor Statistics, “Employment Situation Summary.” For historical data, see U.S. Census Bureau, Income, Poverty and Health Insurance Coverage in the US: 2009.

  12. The 2011 estimate comes from Congressional Budget Office, “An Analysis of the President’s Budgetary Proposals for Fiscal Year 2012,” Table 1.5.

  13. Alicia M. Munnell, Anthony Webb, and Francesca Golub-Soss, “The National Retirement Risk Index: After the Crash,” Center for Retirement Research, October 2009, No. 9-22, p. 1.

  14. Most private-sector pension plans are defined-contribution plans, meaning that the payout upon retirement depends on the cumulative return to the pension investments made on behalf of the individual during the working years. Many public employees at the state and local level, by contrast, have defined-benefit plans, meaning that the government employer must set aside enough funds to ensure the promised payout. If the returns on the pension investments falter, as they did in 2008 and after, more payments have to be made into the pension fund to ensure the adequacy of the investment pool to meet the promised retirement benefits. State and local governments are lagging significantly far behind the required contributions as of 2011.

  15. See International Monetary Fund, “World Economic Outlook Database: October 2010,” for China’s national savings rate.

  16. American Society of Civil Engineers, “2009 Report Card for America’s Infrastructure,” March 2009.

  17. Organisation for Economic Co-operation and Development, Programme for International Student Assessment, “PISA 2009 Results.”

  High school performance is seriously lagging in many other ways as well. During the 1950s and 1960s, the high school graduation rate rose in the United States, but then it began to stagnate and even decline in the 1980s and 1990s. While there has been a slight increase in the past decade, the 2009 graduation rate (defined as the number of high school graduates divided by the number of incoming high school freshmen four years earlier) was still lower than in 1970! The U.S. Department of Education estimates a 78 percent graduation rate in 1970, falling to 74 percent in 1984, 73 percent in 1994, and 72 percent in 2001, before rising to 75 percent in 2008. The gaps between nonwhite Hispanics, at 81 percent, and minority groups (Hispanics, African Americans, and Native Americans), in the low 60s, are large and at best narrowing only slightly. Recent studies show that fewer than half of all high school graduates are “college ready,” meaning that they have the literacy and numeracy to perform at the college level. U.S. Department of Education, National Center for Educational Statistics, June 2010, “The Condition of Education 2010,” p. 214.

  18. John Michael Lee and Anita Rawls, “The College Completion Agenda: 2010 Progress Report,” The College Board, 2010, p. 10.

  19. Ibid.

  20. John Gibbons, “I Can’t Get No … Job Satisfaction,” The Conference Board, January 2010.

  21. See the U.S. Department of Agriculture’s Supplemental Nutrition Assistance Program website (http://www.fns.usda.gov/snap/) for more information.

  22. For wealth inequality, see Office of Management and Budget, “A New Era of Responsibility,” February 2009, p. 9. For income inequality, see Gerald Prante and Mark Robyn, “Fiscal Fact: Summary of Latest Federal Income Tax Data,” Tax Foundation, October 6, 2010.

  23. See Robert Innes and Arnab Mitra, “Is Dishonesty Contagious?,” June 2009, and the references therein.

  24. Goldman Sachs settlement: Patricia Hurtado and Christine Harper, “SEC Settlement with Goldman Sachs for $550 Million Approved by US Judge,” Bloomberg News, July 21, 2010. Goldman Sachs 2009 income: Goldman Sachs website. Countrywide: Alex Dobuzinskis, “Mozilo Settles Countrywide Fraud Case at $67.5 million,” Reuters News, October 15, 2010. Angelo Mozilo net worth: Kamelia Angelova, “Worst CEOs Ever: Angelo Mozilo,” Business Insider, June 8, 2009.

  Chapter 3: The Free-Market Fallacy

  1. Jeffrey Sachs and Michael Bruno, Economics of Worldwide Stagflation (Cambridge: Harvard University Press, 1985).

  2. Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations (Oxford: Oxford University Press, 1993), Book 1, Chapter 2.

  3. Specifically, once the market equilibrium is reached, there is no possible further adjustment of resources (for example, as mandated by the government) that could raise living standards for some part of the population without at the same time making some other part worse off. This notion of efficiency is called “Pareto efficiency.”

  4. Friedrich Hayek, The Road to Serfdom (Chicago: University of Chicago Press, 1944), p. 36.

  5. Smith, An Inquiry into the Nature and Causes of the Wealth of Nations, Book 5, Section 1.

  6. Efficiency should be measured in terms of goods and services of true value to consumers. A rise in the gross national product (GNP) is not enough to prove that efficiency is higher, since GNP may include market transac
tions that don’t really raise well-being (such as those based on fraud, pollution, or a decline in nonmarket services such as leisure time).

  7. Pew Research Center for the People & the Press, “Trends in Political Values and Core Attitudes: 1987–2009,” May 21, 2009.

  8. Forbes, “The World’s Billionaires,” 2011.

  9. The army, police, prisons, and courts constitute the so-called night watchman functions of government. Pure libertarians champion a night watchman state, one that limits its activities to the core tasks of protecting private property, personal security, and national security.

  10. Gallup Poll, “Views of Income Taxes Among Most Positive Since 1956,” April 13, 2009.

  11. Pew Research Center, “Trends in Political Values and Core Attitudes: 1987–2009,” p. 43.

  12. The main exceptions in history are when one ethnic, racial, or religious group leaves another to perish.