Lawrence Summers, former Director of the U.S. Economic Council under Barack Obama, believes his policies are crucial for mending the woes of the world’s economic climate. Without the implementation of his plans, he believes that the risk of a global depression increases significantly. Lunchtime Thursday, he stopped by IAB’s penthouse for a discussion of fiscal stimulus and economic calamity. Bwog’s Chief Supply and Demand Correspondent Grant D’Avino was there to give you the scoop.
At Thursday’s Gabriel Silver Memorial Lecture, Lawrence Summers laid out a vision of the economy similar to the one he held while serving as Director of President Obama’s National Economic Council. His firmly Keynesian explanation for the industrialized world’s economic woes were summed up in one sentence, “There is too little demand.”
With the world economy in what he called “a moment of singular danger,” Summers explained some of the central lessons of economics and teased out their implications for successful policy. “It is not true that what is good for one person is good for everyone,” he said, turning to a concise explanation of the paradox of thrift. The problem, he continued, is that what makes sense for one person—like saving money for the future—can result in economic disaster if everyone does it at the same time, given the right conditions. Summers followed with a point he has made before, “It is the central irony of financial crises that while they are caused by too much confidence, too much borrowing and lending, and too much spending, they can only be solved through more confidence, more borrowing and lending, and more spending.” The failure of many policy makers to recognize these issues, central tenets of Keynesian economics, has contributed substantially to the continued stagnation of the world’s industrialized economies, Summers alleged.
Moving to policy, Summers rejected supply side explanations for a slumping economy outright. Instead, he argued for the continued importance of accommodative monetary policy and fiscal stimulus. In normal times, he said, an economic slowdown calls for a decrease in interest rates by the central bank, meant to lower borrowing costs and help to spur demand. The Federal Reserve, however, hit the “zero lower bound” nearly three years ago, and once the interest rate is zero it can’t go any lower. Avoiding a lengthy discussion of unorthodox monetary policy at the zero lower bound, Summers pivoted to fiscal stimulus. “As an American, I’m not proud of Kennedy airport,” he said, further noting that with unemployment in the construction industry hovering near 20%, and with government borrowing costs at historic lows, this is a perfect moment to make needed investments in infrastructure like airports, bridges, and roads.
Summers blamed an “unfortunate cleavage” in economic debate for the failure to implement his preferred policies. On one side of the divide are the “progressive” and on the other the “pragmatic, business oriented.” The progressive side, in Summers’s telling, is largely receptive to Keynesian stimulus but remains dismissive of the concerns of business. The pragmatic businesspeople, on the other hand, are skeptical of Keynesian policies and emphasize, unsurprisingly, the role of businesses in creating economic growth. This cleavage, fed by “fallacies that permeate our economic rhetoric,” is preventing governments from pursuing policies aiming to stimulate demand and “make confidence a self fulfilling prophecy.”
These fallacies, Summers continued, follow from a common mistake—allowing economic analysis to collapse into a “simple morality tale.” And economic analysis based on a simple morality tale, “like most simple morality tales, is not right.” Reiterating the awesome stakes of today’s policy decisions with an allusion to Europe’s rapidly fracturing currency union, Summers expounded on the role of the economist. Admitting, “none of this is the most inspiring stuff in the world,” he drew for the last time on Keynes to say, “[Economists] are the trustees not of civilization, but of the possibility of civilization.”
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