Thought du Jour

Harvard economist Larry Summers writes that decisive action averted Depression in 2008/2009 but warns that the current recession is turning into a lost decade.

Even with the 2008-2009 policy effort that successfully prevented financial collapse, the US is now halfway to a lost economic decade. In the past five years, our economy’s growth rate averaged less than one per cent a year, similar to Japan when its bubble burst. …. Reports suggest growth is slowing. ….

The central irony of financial crisis is that while it is caused by too much confidence, borrowing and lending, and spending, it is only resolved by increases in confidence, borrowing and lending, and spending. Unless and until this is done other policies, no matter how apparently appealing or effective in normal times, will be futile at best.

The fiscal debate must accept that the greatest threat to our creditworthiness is a sustained period of slow growth. Discussions about medium-term austerity need to be coupled with a focus on near-term growth. Without the payroll tax cuts and unemployment insurance negotiated last autumn we might now be looking at the possibility of a double dip. Substantial withdrawal of fiscal stimulus at the end of 2011 would be premature. Stimulus should be continued and indeed expanded by providing the payroll tax cut to employers as well as employees. Raising the share of payroll from 2 per cent to 3 per cent is desirable, too. These measures raise the prospect of sizeable improvement in economic performance over the next few years.

At the same time we should recognise that it is a false economy to defer infrastructure maintenance and replacement, and take advantage of a moment when 10-year interest rates are below 3 per cent and construction unemployment approaches 20 per cent to expand infrastructure investment.

Lawrence Summers, “How to avoid our own lost decade“, Financial Times, 13 June 2011.

There is nothing new here, but the essay is didactic and well phrased. Lawrence Summers (born 1954) was President Clinton’s Treasury Secretary from July 1999 to January 2001, and Director of President Obama’s National Economic Council from January 2009 to the end of 2010. He is now an FT contributing editor, so we can look forward to more columns from him.

Over the next week some of the world’s leading policymakers and economists will be addressing in the FT the all-consuming contemporary economic debate: austerity versus stimulus. The writers, including Larry Summers, Jean-Claude Trichet and the FT’s Martin Wolf will argue whether cutting now risks suffocating the fragile recovery of the global economy.

This page allows you to see the highlights from each contribution and join the discussion in the comment box at the end of this page.

“The great austerity debate”, FT.com, 18 July 2010.

This debate begins with contributions from Martin Wolf and Larry Summers. Niall Ferguson and Brad DeLong are next in the series. Registration is required to access this page, and free registrants are allowed to view a maximum of ten articles each month. Subscribers to FT have full access to this debate. Below are highlights from the first two articles.

Here is Martin Wolf:

The interaction of high indebtedness with deflation could create a cumulative downward spiral. A Japanese-style “lost decade” threatens the developed world. That is particularly likely if everybody starts to tighten together. If anything, further loosening is needed: in the first quarter of 2010, the gross domestic product of every member of the group of seven leading high-income countries was still below its pre-crisis peak.

Readers must make up their own minds on the merits of the arguments this week. My own strong sympathies are with the postponers. But of one thing everybody agrees: this debate matters. We cannot be sure who is right. But we can be sure that if policy-makers get it wrong, the results may well be dire.

Martin Wolf, “Why the battle is joined over tightening”, Financial Times, 19 July 2010.

And now, Larry Summers:

Economic commentators are mired in an unhelpful dialectic between “jobs” and “deficits” that, despite its apparent simplicity, has obscured rather than clarified the policy choices ahead in the US, Europe and elsewhere.

Critics have complained that President Barack Obama’s continued commitment both to support recovery in the short term and to reduce deficits in the medium and long term constitutes a “mixed message”. In fact, it is the only sensible course in an economy facing the twin challenges of an immediate shortage of demand and a fiscal path in need of correction to become sustainable.

Lawrence Summers, “America’s sensible stance on recovery”, Financial Times, 19 July 2010.