Larry Summers has an account on Quora, the online question and answer site founded by Facebook employees, and he’s answered a few questions about the economy.His key points:
— The U.S. needs to replicate the decision to cut payroll taxes next year, and stimulate demand
— Japan erred on the side of keeping banks healthy and that’s an important lesson for the U.S.
— Recovery from the real estate bubble will take a long time to wear off
Today he answered the question:
In his recent Financial Times column, Larry Summers compares the U.S. economy today to the Japanese economy in the 1990s. [He said that that the U.S. government needs to maintain domestic demand through further spending.] 20 years ago, what steps should Japanese policymakers have considered that would have helped avert the “Lost Decade” economic outcome?
Since the most important risk to America’s economic future is the “Japan in the 90s” lost decade scenario its natural to ask what mistakes they made and how they relate to current American debates.
Salient aspects include:
1. Japan had a much bigger bubble. Stock and real estate are down 80 per cent from past peaks 20 years later. In this respect the US is fortunate.
2. Japan was intermittent in stimulating demand and declared victory at false dawns rather than maintaining stimulus until rapid growth was locked in. This is a danger for us. The decision to cut payroll taxes last fall was important and will need to be replicated this year.
3. Japan was slow in facing up to financial problems. The US was by global standards very rapid. This is good. On the other hand there are issues of keeping banks healthy vs raising the flow of credit where Japan erred on the former side. This may be a useful lesson for USA.
Last week on June 24th, he took this one:
Why does the U.S. economy take increasingly longer time to recover from recessions?
I doubt it’s a trend towards longer recoveries. Instead, it’s the fact that recessions used to be caused by excess inflation and the Fed clamping down with high rates. This is easily reversed. On the other hand, bubble excesses take a very long time to work off.
And here’s another one about the economy he answered on June 13th. (Sidenote: this question is relevant to Summers because he was the President of Harvard, for one, but also because the movie Inside Job criticised schools like Harvard of changing how economics is taught for the worse. The movie pointed to Summers as though he initiated this change at Harvard because he was consulting with hedge funds and other finance firms.)
How has introductory economics changed as it’s been taught in American universities over the past few decades?
Introductory economics has not changed enormously over the years. In part this is because much of introductory economics is established knowledge that does not evolve very much. For example, supply and demand, marginal analysis, and the quantity of money have not changed much.
As with basic physics or calculus, introductory courses do not bring students up to the frontier of economics and so do not change that much.This is reinforced by inertia among teachers of intro economics, and the tendency of popular textbooks not to change too much. And most economists believe in the basic micro/macro divide pioneered by Samuelson.
Main changes that have taken place track changes in economic thinking and in the economy. At least until recently courses have become less and less Keynesian with topics like the multiplier getting less attention than they would have a generation ago. More emphasis on economic growth and less on cyclical fluctuations. There has also been more recognition, though not a lot, at the introductory level of the importance of information asymmetries.
Other changes reflect a changing economy. Much more international stuff. More about China. Less about planned economies. More about finance and how it interacts with the economy. More about the long run costs of budget deficits.
Style has changed relatively little as best I can judge. Obviously some use of computers as devices for testing, exemplifying and illustrating. But in general universities have been surprisingly undynamic. The large podium small chair method continues to be main method of pedagogy.
And in case you were wondering what Larry Summers is doing on Quora, when he was asked why he has an account on the site, he said, “Desire to be part of thoughtful conversation and experimentation with technology. Also friendly with some early users.”