If the U.S. economy is to avoid a nightmarish period of “secular stagnation” – where not even negative real interest rates and “easy” monetary policy can get the economy to produce at its full potential – the government needs to start spending more money, writes former Treasury Secretary Lawrence Summers in a recent Washington Post op-ed.
Summers, whose warning about a stagnating economy have been a constant drumbeat over the past several months, says that the best way to stimulate the increased demand that will drive new hiring is “ending the disastrous trends toward ever less government spending and employment each year and taking advantage of the current period of economic slack to renew and build out our infrastructure.”
Anticipating the argument that increased federal debt would have a net negative effect on economic growth, he continued, “If the federal government had invested more over the past five years, the U.S. debt burden relative to income would be lower: allowing slackening in the economy has hurt its long-run potential.”
Summers, who served as President Obama’s top economic advisor in 2009 and 2010 and was reportedly Obama’s preferred pick to head the Federal Reserve on the departure of current chair Ben Bernanke, made his call for increased spending on the country’s crumbling infrastructure just days after he publicly sparred with fellow economist and Stanford professor John Taylor over the best way to improve the U.S. economy’s slow rate of growth.
At the annual meeting of the American Economic Association on Saturday, Taylor argued that the very kind of policy initiatives that Summers advocates, namely government-driven spending programs, are a main source of the problems facing the U.S. economy. Because emergency initiatives such as the Federal Reserve’s mass purchases of government securities, known as quantitative easing, operate outside the norm of traditional monetary and fiscal policy, he said, the government has created uncertainty in the business community that acts as a damper on economic growth.
Not so, said Summers, now a professor at Harvard. “Expansionary fiscal policy is the right primary response to our current woes.”
While there was disagreement over how best to stimulate economic growth there appeared to be a rough consensus among economists that at the very least 2014 will be better than 2013.
Martin Feldstein, Summers’ colleague at Harvard and a former top economic advisor to President Ronald Reagan, summed up the sense of the economists at the meeting that "2014 has a much better shot than we've had in the last several years of producing stronger growth."
Follow Rob Garver on Twitter @rrgarver
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