Lawrence Summers, former Director of the White House National Economic Council for President Obama, is calling for significant additional economic stimulus to avoid following the pattern of Japan's "lost decades" after their financial crisis of 1990. He writes an op-ed in the June 12, 2011 edition of the Financial Times How to Avoid Our Own Lost Decade.
Summers seems to agree with Robert Reich, who is calling for demand side stimulation. Summers goes even further by explaining that in a demand side contrained economic crisis fo the kind we are in now, tax breaks, and traning programs will not help. Please read The President Must Come Up With Demand-Side Solutions And Not Go Over to the Supply Side, Says Reich.
Even with the 2008-2009 policy effort that successfully prevented financial collapse, the US is now halfway to a lost economic decade. In the past five years, our economy's growth rate averaged less than one per cent a year, similar to Japan when its bubble burst. At the same time, the fraction of the population working has fallen from 63.1 per cent to 58.4 per cent, reducing the number of those in jobs by more than 10m. Reports suggest growth is slowing.
Beyond the lack of jobs and incomes, an economy producing below its potential for a prolonged interval sacrifices its future. To an extent once unimaginable, new college graduates are moving back in with their parents. Strapped school districts across the country are cutting out advanced courses in maths and science. Reduced income and tax collections are the most critical cause of unacceptable budget deficits now and in the future.
When an economy is constrained on the demand side, "measures that usually promote growth and job creation can have little effect, or backfire. When demand is constraining an economy, there is little to be gained from increasing potential supply."
This is the same message Robert Reich just published. I wonder if they know something about the upcoming debt-ceiling compromise we don't yet?
In a recession, if more people seek to borrow less or save more there is reduced demand, hence fewer jobs. Training programmes or measures to increase work incentives for those with high and low incomes may affect who gets the jobs, but in a demand-constrained economy will not affect the total number of jobs.
After bubbles burst there is no pent-up desire to invest. Instead there is a glut of capital caused by over-investment during the period of confidence vacant houses, malls without tenants and factories without customers. At the same time consumers discover they have less wealth than they expected, less collateral to borrow against and are under more pressure than they expected from their creditors.
Substantial withdrawal of fiscal stimulus at the end of 2011 would be premature. Stimulus should be continued and indeed expanded by providing the payroll tax cut to employers as well as employees.
I just published a report on Robert Reich who also called for the proposed payroll tax cut for employers be extended to employees as well. Almost the same wording. I hadn't even realized we were about to extend payroll taxes to employers. Is this a trick to shift attention from Democrats getting ready for another endorsement of supply-side economics?
At the same time we should recognize that it is a false economy to defer infrastructure maintenance and replacement, and take advantage of a moment when 10-year interest rates are below 3 per cent and construction unemployment approaches 20 per cent to expand infrastructure investment.
So, is the stimulus Summers advocating an extension of the Bush Tax cuts, including the reduction of payroll taxes, that will eventually undermine the Social Secuirty Trust Fund? If we do this, the President should insist that the Federal Government reimburse the Social Security Trust Fund, otherwise we our essentially agreeing to Republican demands that we disembowl the SSTF.
I favour demand-side stimulation, but not at the expense of our social programs. We financed over a trillion dollars of unfunded defense spending increases without blinking, for national secuirty. A failing economy is a threat to our national security.
We shouldn't mix limited short-term stimulus for long-term crippling of Social Security, Medicare, and Medicaid.
We should come of with a broad array of conumer-demand stimulating measures, and job expanding measures such as fixing our infrastructure and give tax credits for solar, wind, and other renewable energy projects.