|A White House valet brings Larry Summers, National Economic Council director, a birthday cake in the Oval Office, Nov 30, 2009.|
Larry Summers, former Treasury secretary for President Clinton and
former head of President Obama's National Economic Council, has received a lot
of attention this month for his comments on the obsession with deficits years
ahead when there is a current risk of long-term economic stagnation.
“That is a much more urgent threat to every American interest than anything
about Social Security benefits in 2035, that is a much greater risk to American
interests than anything about the emergence of hyperinflation coming from
monetary policy,” Summers, now a Harvard University professor, said at the Wall
Street Journal’s CEO Council annual meeting this week. “That is where concern
ought to be.”
A key point made by Larry Summers at an IMF research conference on November
8, was that in respect of the years between the end of the dot-com bubble crash
and the beginning of the Great Recession, while there were bubbles in credit,
housing and reckless banking, the main US economic indicators were not
suggesting that the economy was overheating - - Think of Italy growing
at an annual average of 0.3% during a credit bubble and wonder how could it grow
out of a debt burden of 130% of GDP during a period of stagnation?
“Even a great bubble wasn’t enough to produce any excess of aggregate
demand…Even with artificial stimulus to demand, coming from all this financial
imprudence, you wouldn’t see any excess,” Summers said.
“The underlying problem may be there forever”
“We may well need in the years ahead to think about how to manage an economy
where the zero nominal interest rate is a chronic and systemic inhibitor of
economic activity, holding our economies back below their potential.”
Paul Krugman, the New York Times columnist
commented: "Summers went on to draw a remarkable moral: We have, he
suggested, an economy whose normal condition is one of inadequate demand — of at
least mild depression — and which only gets anywhere close to full employment
when it is being buoyed by bubbles.
I’d weigh in with some further evidence. Look at
household debt relative to income. That ratio was roughly stable from 1960 to
1985, but rose rapidly and inexorably from 1985 to 2007, when crisis struck. Yet
even with households going ever deeper into debt, the economy’s performance over
the period as a whole was mediocre at best, and demand showed no sign of running
ahead of supply. Looking forward, we obviously can’t go back to the days of
ever-rising debt. Yet that means weaker consumer demand — and without that
demand, how are we supposed to return to full employment?"
David Wessel, economics editor of The Wall Street
Journal commented: "For the US and other big economies, the pressing question is
no longer how best to treat an acute onset of recession or control an
Rather, it's how to prevent contagious financial crises and how to manage the
chronic disease of very slow growth, a condition once seen as isolated to the
Japanese "lost decade" of the 1990s.
Summers at Wall Street Journal CEO conference:
Summers at IMF conference
Summers at Harvard Q&A - - covers a wide range of economic issues: