Before the recession took hold, former Clinton Treasury secretary Larry Summers wrote some of the most incisive columns about the state of the U.S. and world economies. But when he was an economic advisor for Obama in 2009-2010, I thought he might have gotten caught up in politics too much. Where he had once argued for bold moves, he seemed to lean toward caution. Whatever one makes of the alleged feuding with Christina Romer, it’s now clear that Romer had a more sober assessment of the damage being done to the economy by the recession than Summers did. She argued for even more stimulus spending.
And now Summers — in a piece in the Washington Post — is calling for more stimulus, to prevent “a lost decade.”
Before I get too far, I’d like to encourage a more sober grasp of the word “stimulus”. Tax cuts are stimulative, and that’s why Obama’s first stimulus package contained about $300 billion in tax cuts — and why some payroll taxes were cut earlier this year. Like other spending, government spending also stimulates the economy, especially and most obviously if it is in areas that are almost purely the domain of government: road construction and the military, for example. While tax cuts are stimulative, they do not “pay for themselves” from increased economic activity, with the exception of some very narrowly targeted cuts. Direct government spending is more likely to pay for itself from increased economic activity; the Savannah Harbor Expansion Project, for example, is a perfect example of government stimulus requiring about half a billion in taxpayer dollars that the Corps of Engineers’ thinks will more than pay for itself via increased efficiency in the economy (not from additional cargo).
Like other economists, Summers thinks we need “medium-term measures to restrain spending and raise revenue,” but also “a focus on near-term growth.”
From his WashPo piece:
There is no time for fatalism or for traditional political agendas. The central irony of financial crisis is that while it is caused by too much confidence, borrowing and lending, and spending, it is resolved only by increases in confidence, borrowing and lending, and spending.
It is false economy to defer infrastructure maintenance and replacement when 10-year interest rates are below 3 percent and construction unemployment approaches 20 percent.
While there’s a sometime-manic push to embrace austerity to cut the deficit and debt in the short-term, Summers sees (and I agree) a much more serious threat:
“The greatest threat to the nation’s creditworthiness is a sustained period of slow growth that, as in southern Europe, causes debt-to-GDP ratios to soar.”
I find all of this sort of depressing, I’ll admit, because it seems obvious to me as a local business columnist that the number one problem we’re facing right now is a lack of demand. And sharp cuts in government spending, while necessary over the next decade or so, are simply going to decrease private demand in the short term, while at the same time harming necessary services.
I’ll post this link on Facebook, for example, and a bunch of online acquaintances of mine who haven’t even read this post much less Summers’ op-ed and have equated “stimulus” with “waste”, will start chiming in about how we need to cut a lot and cut right now. There’s no surer path to sending us back into recession.