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News : US Economy Last Updated: Nov 25, 2013 - 9:18 AM


Larry Summers on long-term economic stagnation
By Michael Hennigan, Finfacts founder and editor
Nov 22, 2013 - 2:26 AM

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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 inflationary fever.

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:

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