The U.S. economy is half way to a lost decade because demand is in decline and we’re not doing enough to revive it, according to Larry Summers writing for Reuters.It’s the lack of demand, he argues, that’s caused growth to slow to a crawl pace of 1% on average from 2006 to 2011.
From Larry Summers:
A sick economy constrained by demand works very differently than a normal one. Measures that usually promote growth and job creation can have little effect or can actually backfire. When demand is constraining an economy, there is little to be gained from increasing potential supply. In a recession, if more people seek to borrow less or save more, there is reduced demand and hence fewer jobs. Training programs or measures to increase work incentives for those with both high and low incomes may affect who gets the jobs, but in a demand-constrained economy will not affect the total number of jobs. Most paradoxically, measures that increase productivity and efficiency, if they do not also translate into increased demand, may actually reduce the number of people working as the level of total output remains demand constrained.
Summers believes that this lack of demand needs to be made up through government measures to stimulate it, from further payroll tax cuts to an expansion of government spending on infrastructure.
From Larry Summers:
It follows that the central objective of national economic policy until sustained recovery is firmly established must be increasing confidence, borrowing and lending, and spending. Unless and until this is done other policies, no matter how apparently appealing or effective in normal times, will be futile at best.
We should recognise that it is a false economy to defer infrastructure maintenance and replacement and instead take advantage of the a moment when 10-year interest rates are below 3 per cent and construction unemployment approaches 20 per cent to expand infrastructure investment.
It is far too soon for financial policy to shift towards preventing future bubbles and possible inflation and away from assuring adequate demand.
Summers sums up the goal of the U.S. government as a simple one, “do no harm,” in that any government policy that dims demand cannot go through.
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