A real Larry-Come-Lately, Lawrence Summers, the Director of the White House National Economic Council at the start of the Obama Administration (besides also being Treasury Secretary in the Clinton Administration), has authored an Op-Ed in the Washington Post, warning about the looming, serious danger for the global economic system. That danger consists of an unhealthy mix of persistent weak growth, possible deflation (can global deflation even be a thing?), low interest rates, declining lending and investment, economic inequality and the risk of global recession.
Summers sees a global economy with little prospects for growth, despite continued efforts by central bankers to stimulate investment with zero or near-zero percent interest rates and regular injections of cash into the banking system. To break out of this cycle of low growth, Summers proposes a global effort to use final tools -- government spending to promote jobs, to address income inequality, and to create the dynamic growth needed in a world of rapidly growing population.
Unfortunately, Summers prescription comes 7 years too late...7 years after he rejected similar calls for the newly elected/installed Obama Administration to lead an economic revival with well over a trillion dollars of infrastructure investment and other government spending aimed at directly supporting job creation and economic productivity.
Worse, Summers' call comes 7 years after the political moment presented itself. It is hard to imagine any government, especially our own, much less all governments rallying to support what amounts to a global infrastructure investment program. But, in 2009? With Democrats in charge of both houses of Congress and the White House, and the rest of the world reeling from the financial meltdowns of '07-08, anything was possible.
For the gory details, head below the orange LS monogram (copied from the gold threaded monograms on Summers' shirt sleeves):
Larry Summers has taken this moment to proclaim his conversion to Keynesian policies (not that he would acknowledge that's what he's come to believing). Summers is, after all, the guy who wrote in 2006, that "any honest Democrat will admit that we are now all Friedmanites." Still, in his WaPo piece, he surveys a global economy that can no longer even point to the developing world for signs of strong economic growth and potential growth.
Summers describes the situation as "secular stagnation" - a term that describes a situation in which economic growth doesn't take off, despite the best efforts of central banks to stimulate investment with "loose economic policies." The problem of secular stagnation is becoming a greater concern with the slowdown in Asian economies. According to Summers, the threat
"is growing worse in the wake of problems in most big emerging markets, starting with China."
The nature of the threat is this:
"This raises the specter of a global vicious cycle in which slow growth in industrial countries hurts emerging markets, thereby slowing Western growth further. Industrialized economies that are barely running above stall speed can ill afford a negative global shock."
Summers acknowledges that there is little room left in the tool kit for central bankers to stave off or respond to another potential global recession.
"Today’s challenges call for a clear global commitment to the acceleration of growth as the main goal of macroeconomic policy. Action cannot be confined to monetary policy."
In other words, governments must act with new
fiscal policies -- stimulative government spending...on a big scale...a global scale.
Summers isn't wrong about this...at least he's not wrong now. But, he was wrong in 2009, and the problem with that is that was the political moment to push for the kind of investment he now believes is needed.
Flash back to late 2008-09. Economists were estimating that the financial/economic crash in 2008 had drained perhaps $2 trillion dollars of demand out of the economy. The most respected economists, including Joseph Stiglitz and Paul Krugman laid out the case for government to step in with fiscal stimulus -- governemnt-induced demand to fill this "output gap." Christina Romer, Chairman of the Council of Economic Advisers, floated a proposal of $1.8 trillion in new stimulus.
Summers was deeply opposed to anything like that level of spending. Some in the Adminstration were resisting anything over a trillion dollars based on political judgments about public and Congressional response. David Axelrod worried that asking for 'too much' would undermine the possibility of getting anything.
“If we asked for $1.2 trillion, it probably would have created such a case of sticker shock that the system would have locked up there.”
Summers, however,
thought that Romer's pitch was excessive because a ballooning budget deficit would produce a counter-productive response from bond markets.
He believed that filling the output gap through deficit spending was important, but that a package that was too large could potentially shift fears from the current crisis to the long-term budget deficit, which would have an unwelcome effect on the bond market. In the end, Summers made the case for the eight-hundred-and-ninety-billion-dollar option.
Reportedly, Summers convinced Romer to come down from her $1.8 trillion stimulus recommendation and to make a more practical proposal. When Romer returned with a proposal for $1.2 trillion of spending which, with the multiplier effect could fill the output gap, Summers promised to produce a memo that would outline three proposals, including Romer's and two less ambitious ones to spend either $600 billion or $850 billion.
Instead, Summers' memo to the President omitted Romer's proposal to have the government try to fully fill the output gap. That proposal was never even presented to the President.
Whatever he might be saying about the present circumstance, in 2009 Summers championed a much less ambitious proposal that produced the even more watered-down American Recovery and Reinvestment Act of 2009, which led to a weak recovery and little reinvestment -- a package that authorized spending over a little over half a billion dollars, but only about $100 billion on infrastructure projects, but more than twice that amount in tax cuts and credits.
Summers won't really admit he was wrong, but he is coming close in the WaPo piece:
"History tells us that markets are inefficient and often wrong in their judgments about economic fundamentals. It also teaches us that policymakers who ignore adverse market signals because they are inconsistent with their preconceptions risk serious error. "
Summers hints at saying he was mistaken in relying on conventional "prudent' prescriptions:
"It is an irony of today’s secular stagnation that what is conventionally regarded as imprudent offers the only prudent way forward."
The inescapable truth about our current predicament is this:
"[T]he world’s principal tool for dealing with contraction — monetary policy — is largely played out and will be less effective if contraction comes. It follows that policies aimed at lifting global demand are imperative."
The closest Summers comes to a mea culpa is this declaration:
"The effects of hysteresis — where recessions are not just costly but also stunt the growth of future output — appear far stronger than anyone imagined a few years ago."
Of course, that's just not true. Maybe, he didn't imagine the prolonged future effects of the recession of 2008, but plenty of economists did. Anyone who opened up the pages of
The New York Times on almost any day in early 2009, would have seen these problems predicted in the arguments of Stiglitz and Krugman. There were also over 100,000 people on Daily Kos warning about the economic and the political risks of an insufficient stimulus.
Unfortunately, Summers refused to give enough credence to the recommendation of the Chair of the Council of Economic Advisors to even pass it along to President Obama. So, the persistent stagnation isn't "far stronger than anyone imagined." Just far stronger than Summers was willing to imagine.
Now, complaining about Summers' sudden, kinda welcome change of heart might seem petty or crying over spilled milk. Except that it's not just about A missed opportunity. We're talking about THE missed opportunity. One has to ask what Summers thinks his piece can accomplish in the current political climate.
In 2009, Summers had President Obama's ear. In 2015, he has really little influence left with anyone. Perhaps, Hillary Clinton will be impressed by Summers' turnabout. Even if she is convinced, does any of that matter now? (I'm not forgetting about Sanders --he doesn't need convincing, but the Congress does). In 2009, the window of opportunity for strong fiscal spending was wide open in the United States. If it had succeeded here, European countries that were struggling to recover would surely have followed our lead.
Looking at the current circumstances, it seems that window of opportunity has been slammed closed. It's also been boarded over and screened with iron gates, chains and padlocks.
Here, we have Republican majorities in both houses of Congress and it will be nearly impossible to overturn both of those in the next election. We even have numerous Republican governors who reject federal funds to score political points, even as their residents complain about lack of health insurance or crumbling infrastructure. Moreover, in Europe, austerity has won the day politically, even as numerous economies are buckling under the strains of austerity policies.
Summers can ask for concerted, fiscal stimulus applied locally and adopted globally, but there is no prospect that the current leadership anywhere has any appetite to follow such a policy. The idea that policymakers around the globe would come together and craft a new global stimulus initiative is fantastical. I guess we hope for a whole new batch of leaders and a new political dynamic that would be open to the idea in a few years -- and up to 4 or 5 years in the U.K. -- but, even new leaders would find it much more difficult to make the argument in current circumstances than they would have had in the wake of the Great Recession, in 2009.
So, thanks for coming around, Larry Summers. Where were you in 2009? And, now that you have come around, what are we supposed to do about it now?