The American economy is changing, and our policy responses -- especially with regard to interest rates as they relate to growth and full employment -- need to be re-examined. I have three propositions:
- First, as U.S. and industrial economies are currently configured, simultaneous achievement of adequate growth, capacity utilization, and financial stability appears increasingly difficult.
- Second, this is likely related to a substantial decline in the equilibrium or natural real rate of interest.
- Third, addressing these challenges requires different policy approaches than are represented by the current conventional wisdom.
He can't even bring himself to say "unemployment," which is the principle issue in the lagging recovery. Instead, its "capacity utilization" in spite of lagging demand and rising unplanned inventory. This man has a reputation for being the smartest person the room?
After considerable folderol about the natural rate of interest, he gets to the point — demand.
After considerable folderol about the natural rate of interest, he gets to the point — demand.
The preferable strategy, I would argue, is to raise the level of demand at any given rate of interest, so as to raise the level of output consistent with an increased level of equilibrium rates and mitigate the various risks associated with low interest rates that I have described.Where is the demand to come from? You guessed it. 1. Investment. 2. Exports. 3. Public investments.
How might that be done? It seems to me there are a variety of plausible approaches, and economists will differ on their relative efficacy.
Anything that stimulates demand will operate in a positive direction from this perspective. Austerity, from this perspective, is counterproductive unless it generates so much confidence that it is a net increaser of demand.
At the end, it drops the bomb. Maybe he's smarter than he sounded at first.
The simulations performed addressed a 1 percent increase in the budget deficit directed at government spending maintained for five years, tracking carefully the adverse effects on the impacts on investment and labor force withdrawal which in turn affect the economy's subsequent potential. The simulations also recognize that until the economy approaches full employment, it is reasonable to expect that the zero interest rate will be maintained, and the standard Fed reaction function is used after that point.In other words, inflation will not be an issue as long as the economy can bring idle resource on line and also expand investment in order to meet increasing demand from stimulus.
Simulations show what you might expect them to show, that while the fiscal stimulus is in place, there is a substantial response, a greater response when allowance is made for labor force withdrawal effects than when no such allowance is made. What is perhaps more interesting is that you see some long-run impact of the stimulus on GDP after it has been withdrawn. That is why the potential multiplier can be quite large.
And my final point -- this shows the impact of this fiscal stimulus on the debt-to-GDP ratio. You will note that with or without taking into account labor force withdrawal, using this standard macroeconometric model, a temporary increase in fiscal stimulus reduces, rather than increases, the long-run debt-to-GDP ratio.
Now, there are plenty of political economy issues, of whether it is possible to achieve a temporary increase in government spending, and so forth. But I believe that the demonstration that with a standard model, increases in demand actually reduce the long-run debt-to-GDP ratio should contribute to reassessment of the policy issues facing the United States and push us towards placing substantial emphasis on increasing demand for adequate economic growth. This should serve as a prelude to the day when we can return to the concerns that I think almost all of us would prefer to have as dominant: the achievement of adequate supply potential for the U.S. economy.The World Post
Why Austerity Is Counterproductive In The New Economy
Larry Summers | President Emeritus and Charles W. Eliot University Professor of Harvard University and former U.S. Treasury Secretary
6 comments:
Summers is such a dork. He seems to do nothing but distill and regurgitate the stuff other people have been saying for many years previously, but in an authoritative tone of voice that signals this is now the official position of the Economic Politburo. Has this guy contributed a single original insight since our troubles began? I can't remember one.
"Austerity, from this perspective, is counterproductive unless it generates so much confidence that it is a net increaser of demand."
Whaaaaaaaaaatttt???????
Do I even have to say it anymore?
We are LIGHT-YEARS ahead of these people.... they are sub-human.
Confidence Men by Ron Suskind. Anyone read this?
I didn't read the book but have read reviews. Shows the president up as a neophyte and amateur, out of his depth, or as one reviewer put it, "smart, but not smart enough." It's also clear that Obama's decision to create an adversarial "team" was a mistake. It blew up in his face and he lost respect. Bad scene.
I agree: Summers is a waste of space.
Re the “financial stability” he wants and absence of “financial bubbles” he also wants, one way to achieving that (at least to some extent) is to have lending institutions funded just by shareholders, while deposit taking institutions are barred from investing in anything other than base money (i.e. they’d become full reserve).
That way, it’s impossible for lending institutions (aka banks) to go bust. And deposit taking institutions cannot go bust either. That's what Milton Friedman advocated, and I think he was right.
I'm starting to think it's Harvard. That place is a cauldron of elitist stagnation. All the good people seem to drop out. Gates, Zuckerberg, and these.
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