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Columbia Universith professor Jeffrey Sachs at the Millennium Summit in Montreal in 2009.‘It is time to reconsider the revival’ of Keynesianism, Prof. Sachs told the Financial Times on Tuesday.John Morstad/The Globe and Mail

They're getting restive around the economics department at Columbia University in New York.

Democrats and Republicans are nearing agreement on the "fiscal cliff." This, we assume, is reason to cheer. Yet there's Jeffrey Sachs, economics wunderkind and head of Columbia's Earth Institute, in Tuesday's Financial Times declaring that we've got it all wrong.

"It is time to reconsider the revival" of Keynesianism, he says.

Prof. Sachs is in esteemed company. Nobel economist Edmund Phelps, another Columbia professor, used a speaking engagement hosted by the National Economists Club in Washington to call for a complete change in economic theory to bring about a change in U.S. political culture.

Prof. Phelps says the economic dynamism that separated the United States from the rest of the world for much of its history has been defused by a combination of "crude" Keynesianism and corporatism.

Keynesians, Prof. Phelps says, make the mistake of confusing the economy for a machine that can be "dialed up" by stoking demand.

Corporatists are driven to use economic policy to shape society. It's a bi-partisan label. For Prof. Phelps, former president George W. Bush, with his big deficits and "free pills" for seniors, is as much a corporatist as Nancy Pelosi, the top Democrat in the House of Representatives.

Both approaches to economic policy have the effect of smothering innovation, says Prof. Phelps. The Keynesian urge to generate economic growth in the short term is out of sync with the forward-looking nature of modern business. In their rush to smooth rough patches in the economy's trajectory, policy makers end up dampening business investment by creating an uncertain climate for innovation.

Prof. Sachs makes the same point, arguing that policy must align with the "investment cycle," not over a year or even the business cycle.

"Trillions of dollars of public and private investments are held up for lack of strategy," he argues in the FT. "The Keynesian approach is ill-suited to this kind of sustained economic management, which needs to be on a timescale of 10-20 years, involving co-operation between public and private investments, and national and local governments."

Both Columbia professors insist they are neither theorists nor ideologues; evidence, they say, is on their side. Prof. Sachs points to the failure of President Barack Obama's stimulus program to spark rapid job creation.

Prof. Phelps sees proof that the current economic paradigm isn't working in the U.S.'s deteriorating productivity rate. With a tax system that is skewed heavily toward spenders, and entitlement programs inflating an average household's sense of wealth, the entrepreneurial energy that made the U.S. the world's biggest economy is all but snuffed out, Prof. Phelps says.

"You can't have disruptive innovations if you are going to insist that you have to have smooth sailing," Prof. Phelps said Monday evening. "You can't have growth if your policies are anti-growth."

For now, Profs. Sachs and Phelps are voices in the wind. They could remain so, as the U.S. electoral cycle is ill-suited for long-term policy making. Next year, lawmakers are poised to overhaul the tax code. That should create an opportunity for fresh thinking about U.S. economic policy.

Prof. Phelps would like to see the creation of a federal innovation bank for entrepreneurs modeled on the farm credit system. But new ideas like that will be up against a byproduct of the corporatist system that Prof. Phelps says has taken hold of Washington – special interests.

A corporatist system is run by elites, and elites can be lobbied.

Rather than a true overhaul, next year's negotiation over the tax code promises to be a bloody fight waged by trade associations and corporate lobbyists bent on protecting the benefits they've won over the past few decades.

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