Daily Times

When I met Jeffrey Sachs, an economist at Columbia University and the author of “The End of Poverty,” for coffee recently, he was stubbornly holding on to a sense of optimism in spite of a discouraging turn in world events. Sachs served as an adviser to Bernie Sanders during his Presidential campaign, and has published a new book, “Building the New American Economy,” in which he presents the policy ideas that likely would have animated a Sanders Presidency-ideas that feel almost inconceivable in the current political climate.

At the core of Sachs’s argument is the idea that the United States has been locked in a self-destructive tax-cutting mindset since January 20, 1981, the day Ronald Reagan was inaugurated as the nation’s fortieth President. From that point forward, he argues, the country stopped funnelling sufficient resources into areas of society that are now in decline: the construction and maintenance of highways and airports; an education system that adequately serves people from all economic backgrounds; public health, technology, and communal spaces. Against a backdrop of the dramatic shifts in the global economy, the predictable result has been the gradual weakening of the middle class, the same group of people who finally rose up and reacted in anger and frustration, contributing to Donald Trump’s election to the Presidency. “Long-term economic improvement occurs when societies invest adequately in their future,” Sachs writes. “The harsh fact is that the United States has stopped investing adequately in the future; slow U.S. economic growth is the predictable and regrettable result.”

Even if the economy were growing robustly, Sachs points out, it wouldn’t guarantee that the wealth being generated is spread around in ways that encourage long-term prosperity. Over the last few decades, economic growth has disproportionately accrued to the wealthy, “who least need it,” he says, leaving far too many people struggling. Median household incomes in the United States, when adjusted for inflation, have barely changed since 2000; most Americans still haven’t recovered whatever economic footing they had prior to the financial crisis.

The steps that Sachs suggests are necessary to reverse this stalled growth and imbalance between the very wealthy and everyone else include the restoration of the government’s role as a master planner of ambitious public-works projects on par with the creation of the national highway system, along with the raising of tax revenue to fund those kinds of projects. The sweeping but vague pronouncements emanating from the Trump Administration are not encouraging on this point: While Trump announced plans for a trillion-dollar infrastructure investment during his address to Congress this week, he has offered almost no details on how it would work or be funded, other than suggesting that it would involve enormous tax credits to incentivize private companies to get involved. He has made no indication as to how such a program would be administered, what projects would be tackled, or how it would be paid for.

The third step Sachs suggests seems equally unlikely to come to pass under a Trump Administration, but it is possibly the most intriguing: Sachs advocates the reorienting of the financial system away from short-term speculation and back toward the sorts of activities that help businesses grow. It may sound obvious that the purpose of banks is to lend money to businesses-which in turn hire employees, buy equipment, and make the economy hum. But, since the nineteen-eighties, Wall Street and the big banks and brokerage firms have shifted their emphasis away from the crucial but unglamorous task of helping companies gain access to capital that others have to lend. Instead, much of Wall Street has come to rely not on interest from loans for its profits but on short-term trading, at the expense of almost everything else.

Steven Cohen, the founder of the hedge fund S.A.C. Capital, whose rise and fall is the subject of my book, “Black Edge,” was one of the early pioneers of short-term trading. The hedge-fund business grew, over the course of the nineties and the two-thousands, into the dominant industry on Wall Street, believed by one estimate to manage three trillion dollars in assets. S.A.C. was not built on Warren Buffet-style long-term investments in companies but through rapid-fire trading that generated profits on the rising and falling of stocks. This made Cohen and others like him enormously wealthy while doing relatively little, their critics argue, for the economy as a whole. This critique doesn’t capture the contributions hedge funds have made: they have historically played a role in exposing frauds and other problems at companies, and their high returns (when they’ve happened) have accrued to the pension and endowment funds that invest in them. But the short-term, high-velocity mindset that they embody spread to every actor in the financial system. Soon the major banks and other financial institutions were doing everything they could to cater to hedge funds, while also trying to emulate them by engaging in proprietary trading with their own money, or even buying hedge funds outright or starting their own. As for Cohen, his fund, S.A.C. Capital, was indicted for insider trading, in 2013, and ultimately shut down. Cohen came to stand for the idea of Wall Street as a crazy profit machine for those who work there, at the exclusion of everyone else.

Sachs, for his part, views this mindset as a toxic influence on the larger economy. We need “to shift Wall Street from high-frequency trading and hedge fund insider trading back to long-term capital formation,” Sachs writes. “We remember J. P. Morgan as a titan of finance not for shaving a nanosecond from high-frequency stock market trades, but because his banking firm financed much of America’s new industrial economy of the early twentieth century, including steel, railroads, industrial machinery consumer appliances, and the newly emergent telephone system.”

The economic transformation Jeffrey Sachs envisions would require a reshaping of the culture of the financial industry. Prudent regulation could accomplish some of that by making short-term speculation costlier, and by requiring banks to align their compensation plans with their profits and losses over longer periods of time, and by reducing banks’ and bankers’ ability to distance themselves from the risks they take. Enforcement of securities laws, and creating an environment where senior bankers and traders face prosecution for their crimes, would be a powerful disincentive to reckless behavior-a stark contrast to the pay-your-way-out-of-trouble model that emerged from the financial crisis, when most banks and hedge funds like S.A.C. settled charges with fines. The Dodd-Frank financial-reform legislation passed after the crisis has been criticized for its complexity and is under attack in the Trump Administration, but it went part of the way toward making the financial sector more conservative. “Wall Street’s true future vocation should be to underwrite the new age of sustainable investments in renewable energy, smart grids . . . high speed rails, broadband connected schools, and hospitals and other strategic investments of the new era,” Sachs writes. “The financial industry, which created so much mayhem and destruction in the last decade, would once again return to its core vocation.”

Even as President Trump prepares to cut back on financial regulation, Sachs was able to find historical reasons to be optimistic about the future. “I am counting on [the historian] Arthur Schlesinger, Jr., coming through, because he championed an idea which I bought hook, line, and sinker, that America has political cycles. And we are well overdue for a progressive cycle,” Sachs said. “Just as the Gilded Age was followed by the progressive era, and the roaring nineteen-twenties were followed by the New Deal, and just as the postwar Eisenhower years were followed by the Kennedy-Johnson period, which was a very transformative period of policies. We will get out of the Reagan era yet.”