Larry Summers on how to fix the US economy

Tyler Cowan argued that a recent interview with Larry Summers was the best single statement on the topic of the current stagnation.  Summers correctly notes that the US economy is 10 per cent below where we (i.e. he) thought it would be in 2007.  He also correctly argues that the demise can be traced back a dozen years. 

But his analysis goes downhill from there.

First, he argues that the housing bubble was beneficial because it boosted GDP by 2-3 per cent and raised consumption levels; the failings were that it was insufficient to permanently kick-start the economy.  In fact the housing bubble and consumption boom sucked income from productive investment and, like all such government induced stimuli, lowered the underlying productivity growth of the US economy. 

Secondly, he argues that part of the reason for the stagnation was some countries’ “large-scale reserve accumulation”.  While it is better all-round if exchange rates are not manipulated by governments, it must be remembered that current account surpluses are balanced by capital account outflows.  That means a flow of resources to the counties operating the current account deficits, resources which add to the deficit countries’ investable funds, if they are operating their economies wisely.   Of course, if the recipient countries are not well managed, the inflow will simply be used to increase their levels of consumption in a way that has been observed and that cannot be sustained. 

Thirdly, he laments what he sees as a fact that a greater inequality in earnings has taken place in the US and that the poor save far less of their income than the rich bringing about deficient consumption. He seems to be unaware why the poor save so little – it cannot be because they need all their income as the Chinese, who are very much poorer than Americans, save 50 per cent of their national income compared to 17 per cent in the US.  Again, he sees the route to growth as consumption expenditure with no regard to the fact that this is made possible only by higher levels of production, a key factor in which is higher productive (market-driven) investment. 

He poses three possible solutions.  The first is to do nothing and let the economy cure itself.  He says, seemingly unaware of the fact that the US budget is covering only two thirds of government spending and the massive infusion of credit through the Fed activities, that this has been the approach!

His second strategy is to ensure interest rates fall to zero – presumably with negative interest rates on government bills.  He also, confusingly, says this strategy has been followed and considers it preferable to the do-nothing approach but considers there is a risk because investments will have been funded at such low rates.  He also considers this is a poor strategy since driving down interest rates inflates asset values to the benefit of the rich. 

His solution is government investment in infrastructure, energy regulations to stimulate demand, more funding of R&D and “a concerted effort to raise exports”.  At least that approach addresses the supply side.  But it does so in a winner-picking statist way and without any suggestion that other areas of spending are to be reduced to make room for the new programs. 

Maybe the world dodged a bullet in avoiding having Summers as the Chairman of the Fed, but then again Yellin may be worse and Bernanke was no better.

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47 Responses to Larry Summers on how to fix the US economy

  1. Token

    Thanks Alan for increasing the number of posts.

    Maybe the world dodged a bullet in avoiding having Summers as the Chairman of the Fed, but then again Yellin may be worse and Bernanke was no better.

    Who would be an appropriate person at this point in time?

  2. Percy

    What, he doesn’t mention Tariffs or Subsidies? How can anything be expected to grow without protection?

    And surely there is a way for the Government to access the giant mounds of cash under the matresses of those damn neocons.

  3. Ant

    Whoever the Fed Chairperson is, they should make it a condition of employment that they and their family live in a clapped out trashy trailer park in an area thick with unemployed miniorities for the duration of their tenure.

    Living in an ivory tower and being showered with luxuries can lead to a certain detachment from reality.

  4. Petros

    The housing bubble was beneficial? What the? Presumably he thinks Fannie Mae and Freddie Mack were great ideas too. Yes, let’s give loans to people that can’t pay them. Fools.

  5. Token

    And surely there is a way for the Government to access the giant mounds of cash under the matresses of those damn neocons.

    I know you meant that as tongue in cheek, but along those lines one lefty regular really did create a post in the OT yesterday suggesting Smaug in the Hobbit 2 is like all those companies sitting loaded with cash on the balance sheet, waiting for a gubbermint type to slay them so the economy can be stimulated with the gold.

  6. Alan Moran

    Token

    For the Fed head, one could not do better than david stockman

  7. .

    First, he argues that the housing bubble was beneficial because it boosted GDP by 2-3 per cent and raised consumption levels; the failings were that it was insufficient to permanently kick-start the economy. In fact the housing bubble and consumption boom sucked income from productive investment and, like all such government induced stimuli, lowered the underlying productivity growth of the US economy.

    This is the exact argument from Nomura, and the argument I have against their explanation of the macro arm of Abenomics.

    It rests upon the stock market having a wealth effect (monetary illusion) and the nominal change in output having inflation adjusted improvements (thus higher real corporate profits & dividends).

  8. .

    I know you meant that as tongue in cheek, but along those lines one lefty regular really did create a post in the OT yesterday suggesting Smaug in the Hobbit 2 is like all those companies sitting loaded with cash on the balance sheet, waiting for a gubbermint type to slay them so the economy can be stimulated with the gold.

    Not quite. If only Smaug created more worthless money in parallel to his hoard, would he then spend, believing he really had more.

  9. Bruce

    Why doesn’t he realise that regulation is stifling his country? The SME business owners I hear from are drowning in often contradictory laws, which a generous helping of Obamacare slathered on top. Why would anyone bother. I suspect people are just giving up and going off to do something less futile with their lives than trying to run a business.

    Its pointless having zero interest rates when no one can meet hurdle because it is unprofitable to invest.

    US listed companies are buying back their shares at record rates because their own capital cannot get a return if they invested it. So why borrow when there’s no way you can make a profit?

  10. Andrew of Randwick

    Maybe the world dodged a bullet in avoiding having Summers as the Chairman of the Fed

    Is this another example of the “age of celebrity”?
    What powers does the Fed Head really have, besides being a spokesman? (remembering the other board members and the regional federal reserves).
    .

    The Cabinet
    The Cabinet includes the Vice President and the heads of 15 executive departments — the Secretaries of Agriculture, Commerce, Defense, Education, Energy, Health and Human Services, Homeland Security, Housing and Urban Development, Interior, Labor, State, Transportation, Treasury, and Veterans Affairs, as well as the Attorney General.

    What does the Cabinet do – and does it accept responsibility for low economic growth?
    And can it change the country?

  11. .

    Bruce – Stossel’s Everything Illegal shows how ridiculous, prospperity destroying, illiberal and absurd some of those laws actually are.

    Sunset clauses on legislation would put a stop to this.

  12. blind freddy

    And here I thought Larry Summers was a comedian!!!!

  13. Luke

    “First, he argues that the housing bubble was beneficial because it boosted GDP by 2-3 per cent and raised consumption levels; the failings were that it was insufficient to permanently kick-start the economy. In fact the housing bubble and consumption boom sucked income from productive investment and, like all such government induced stimuli, lowered the underlying productivity growth of the US economy. ”

    This is why I fear for our Australian economy. Between every increasing government expansion and the every increasing cost of housing far far too much of Australian’s economy is being taken away from productive investment. As baby boomers retire and die they are being replaced with people who, rather than having income from housing, are having every more of their income taken up with housing costs. And every generation down gets worse.

    Which is a healthier economy? One where new buyers spend around 25% of one of their incomes on housing or the one where new buyers are spending upwards of 60% of their combined income on housing.

    Yes most boomers got houses in the days where the average house could be purchased with 25% of one income, regardless of how high interest rates temporarily went.

    Not to mention that technology and more user pays government services have increased fixed costs for longer living people as well. e.g. a trip to the doctor is now more expensive and more often than not now includes costs for medications and other medical disagnostic services like MRIs etc.

  14. Andrew

    Larry Summers on how to fix the US economy

    Step 1: Pick the best candidate currently on the Fed.
    Step 2: Discard this person for having insufficient X-chromosomes after discussions with Senate Democrats Femocrats, and appoint token wymin
    Step 3: Boast about what a great step for wymin this is
    Step 4: What were the talking about again? Oh right, the economy. Didn’t we just fix that?

    He says, seemingly unaware of the fact that the US budget is covering only two thirds of government spending

    Um, CBO figures suggest that observation is very out of date. CY13 is coming in at 18% of GDP revenue and 22% of GDP spending. It’s above 80% – in fact, the US has surpassed AUS in fiscal conservatism this year (no thanks to the fucking Kenyan).

  15. .

    Housing costs are partly to do with taxes, the credit based business cycle (creating malinvestments, lowering real wages and creating the wrong kind of housing stock) but also when the boomers kick the bucket, houses will presumably be cheaper.

    Their kids will pay and their grankids may have cheap housing.

  16. I know you meant that as tongue in cheek, but along those lines one lefty regular really did create a post in the OT yesterday suggesting Smaug in the Hobbit 2 is like all those companies sitting loaded with cash on the balance sheet, waiting for a gubbermint type to slay them so the economy can be stimulated with the gold.

    Not companies so much. Companies have a lot of cash lying around – much of it overseas in tax havens, which is a related but different problem – but they are choosing not to invest because they see nothing worth investing in. This is partially because of laws restricting IPOs and other vehicles for speculative technological ventures, and partially because there hasn’t been a big technological breakthrough in recent times – though the latter may also be caused somewhat by the former.

    No, it’s individual billionaires in the 0.1% who are the Smaugs.

  17. Petros

    Dot, I think the moves to allow foreigners to buy 100 percent of new housing developments (thanks Kevin) will more than offset the boomers selling up/dying out. Lots of people overseas want a piece of Australia. The boomers are already downsizing but housing is on the up again.

  18. JC

    The vast bulk of the money held overseas is being held by established companies, Monster. It’s not held by revenue only tech firms. Shut up.

  19. .

    Okay monty tell me what the profit retention rate is for AAPL or BHP. Then tell me how much less the economy would grow if they did not do this. Also tell me how much less the economy grows from not having banks lending out money and if all capital investment must be from proceeds of sales on consumer goods or if it would be in the sector of the economy where the returns and hence growth would be the greatest.

  20. Token

    No, it’s individual billionaires in the 0.1% who are the Smaugs.

    The true Smaugs are the endowments like Getty, Rockefeller, Ford, etc whose funds are being used to shut down new development. The dragons sitting on the piles seem to be neo-luddite greens.

  21. .

    Petros
    #1152012, posted on January 15, 2014 at 11:42 am

    Dot, I think the moves to allow foreigners to buy 100 percent of new housing developments (thanks Kevin) will more than offset the boomers selling up/dying out. Lots of people overseas want a piece of Australia. The boomers are already downsizing but housing is on the up again.

    No, it will see more supply come on line quicker. You are telling to keep an abundant but non substituable resource locked up for longer lowers the price?

    This is incorrect – it is the strategy that cartels use to keep prices high such as OPEC.

  22. .

    JC
    #1152014, posted on January 15, 2014 at 11:43 am

    The vast bulk of the money held overseas is being held by established companies, Monster. It’s not held by revenue only tech firms. Shut up.

    Why would technology firms retaining profits reduce the rate of economic growth?

    Imagine if Edison had to spend all his cash from his first invention on retail goods and was not allowed to reinvest in his own inventiveness.

  23. Apple’s foreign and domestic cash reserves, if taken in aggregate, constitute around 10 percent of U.S. corporate cash, if you discount financial corporations.

    [...]

    An internal document dated May 21, 2013 detailing how Apple arranges its affairs to avoid paying taxes – a perfectly legal and expected endeavor – indicates that the company had $145 billion in cash, of which $102 billion, or 70 percent, was foreign.

  24. JC

    Apple isn’t an established company, Monster?

    I’m well aware of Apple’s total cash hoard including foreign and domestic being around $120 billion. Apple wouldn’t need to bring money home to anchor expansion plans.
    As I said, shut up.

  25. The vast bulk of the money held overseas is being held by established companies, Monster. It’s not held by revenue only tech firms. Shut up.

    I never said it was held by revenue only tech firms. Nice straw man, JC. My whole point is that it is held by the Apples and Googles of the world, and not being reinvested in technology at a fast enough rate. The main consequence of this is a lack of technological innovation, which slows down productivity gains across the rest of the economy.

    The legacy of the latest dot com bubble was over-regulation of the IPO market, such that build-to-flip is the model that works consistently these days, and that does not scale.

  26. Bruce

    AAPL invests its cash pile for a return. Therefore they are not sitting on it.

    Investment creates growth, unless you are monty.

    The problem is they cannot find anything in their business that is worth investing in. Multiply this with the other dozens and dozens of large companies in the US in the same boat and you see what the problem is. Bernanke has been making it worse by depressing the very instruments they invest in, yet still they can’t meet hurdle for their own projects. Which is why companies are giving money back, in effect saying to their shareholders ‘well stuffed if we know where to get a profit, here you take it and try yourself’.

  27. Token

    The main consequence of this is a lack of technological innovation, which slows down productivity gains across the rest of the economy.

    Your chain of logic does not make sense.

    Why do companies have to make resource allocations?

    Many of the critical innovations are made with minimal capital, and companies like Apple, etc squander capital and inhibit the innovation process when they jump in and buy up the innovators.

  28. JC

    The main consequence of this is a lack of technological innovation, which slows down productivity gains across the rest of the economy.

    That rule has been around for decades. It just didn’t show up since the Kenyan was president. It didn’t retard Apples move into the smart phone, nor Google’s advance in search engine capabilities. Furthermore it didn’t retard the dot com era.

    The GOP has made numerous suggestions about this anomaly, one of which is to lower the corporate tax rate and eliminate the offshore rule.

    You can’t say the money being hoarded overseas would be used by these firms to advance innovation as you just don’t know enough to say this. R&D is not without purpose, so they aren’t go to throw money at it like you’re suggesting., They money would likely go to the shareholders.

    The legacy of the latest dot com bubble was over-regulation of the IPO market, such that build-to-flip is the model that works consistently these days, and that does not scale.

    Yep.

  29. Paul

    “Maybe the world dodged a bullet in avoiding having Summers as the Chairman of the Fed”

    The world still took a bullet or two. Summers not being there probably stopped it being a hail of bullets.

  30. Percy

    From Monty’s link

    Apple remains immensely wealthy. Today, however, activist investor Carl Icahn announced that he is pressing the company to add $90 billion to its share repurchase program, which would strain Apple’s cash position.

    Clearly, Apple’s mountain of gold ain’t big ’nuff.

  31. Percy

    Continueing on -

    An internal document dated May 21, 2013 detailing how Apple arranges its affairs to avoid paying taxes – a perfectly legal and expected endeavor – indicates that the company had $145 billion in cash, of which $102 billion, or 70 percent, was foreign.

    That’s to say that Apple the international conglomerate has $102 billion in cash, equivalents, and marketable securities abroad from its titular home country of the United States. Cash is not mobile across certain borders. If Apple wanted to bring that money “home” it would pay a stiff corporate tax rate. So, most of its cash is essentially exiled in perpetuity.

    To count it as cash that sits under the jurisdiction of a company that we can deem a U.S. firm is to therefore bend the definition of what is reasonable.

    There we have it, bending the definition of what is reasonable.

  32. JC

    yet still they can’t meet hurdle for their own projects.

    Bruce,

    S&P will make around 120 bucks. It’s a record result.* I reckon it could be closer to 125 bucks a share.

    The cash hoard is being caused by a couple of things. The Kenyan’s continuing supply side shocks and the desire by firms to remain cashed up after the fiasco of the GFC.

    It’s a funny thing though… the time to be cashed up was just before o7 and I reckon the time to pull all levers should be now when credit for the very good names is so cheap.

    About a year ago or so ago, BHP was able to borrow 30 yer money at 3%. 3 fucking %!

  33. Petros

    Dot, I don’t quite follow your post. I’m not an economist (which, no doubt, is obvious). Now the thread has gotten bogged down in arguing with Monty again. Sad.

  34. twostix

    No, it’s individual billionaires in the 0.1% who are the Smaugs.

    So after finding out that “1%” are actually Obama voting democrats it’s now been redefined to the “0.1%”.

    lol

  35. Percy

    Now the thread has gotten bogged down in arguing with Monty again.

    I’ll take some responsibility there Petros. Apologies.

  36. twostix

    No, it will see more supply come on line quicker. You are telling to keep an abundant but non substituable resource locked up for longer lowers the price?

    That’s not happening dot, it should but it’s prevented by state governments too piss weak to dump the (non) development rules of the previous Green / Labor governments and terrified of having housing prices fall on their watch.

  37. Bruce

    The Kenyan’s continuing supply side shocks and the desire by firms to remain cashed up after the fiasco of the GFC.

    Actually in the case of companies like AAPL it is the demand side shocks Obama is causing. Median household income was down severely even before Obamacare arrived. Now Obamacare is forcing employers to reduce employee hours under the 30 hr threshold – they still count as employed in the stats, yet are taking home less money. And the reduced hours employees then have to pay the enormous insurance premiums and sky-high deductibles, which are cannibalising what few disposable dollars they have left.

    If no one can afford to buy the latest Apple widget you can see why they can’t invest in a plant to build it.

    Multiplied by thousands of other companies. What a nice commie Kenyan he is. Perhaps when he leaves office in the US he’ll get a gig in Cuba when Castro shuffles off.

  38. Pedro

    “First, he argues that the housing bubble was beneficial because it boosted GDP by 2-3 per cent and raised consumption levels; the failings were that it was insufficient to permanently kick-start the economy. In fact the housing bubble and consumption boom sucked income from productive investment and, like all such government induced stimuli, lowered the underlying productivity growth of the US economy.”

    You need to be a bit careful when fretting about the housing bubble. A house is an investment as much as it is consumption. People have to live somewhere. The pace of housing construction can get out of whack with demand, but if the population is increasing then demand will likely catch up, as it seems to have done.

  39. Andrew

    the company had $145 billion in cash, of which $102 billion, or 70 percent, was foreign.

    Astonishing! NonUSAia, a country of approximately 6.7bn people, is where a lot of Apple’s manufacturing and sales occurs (both hardware and iTunes). AAPL choses to leave the cash where it is, where it will be spent on marketing, building new plants, employing R&D teams, acquiring other businesses founded by the 97% of the world’s population (the NonUSAians) etc rather than pay 30% tax to wash it through USA before sending it back to NonUSAia to be spent on their business. Who’d have thunk it? Fortunately, we’re informed for clarity that what AAPL is doing it “legal.”

  40. Why do companies have to make resource allocations?

    They don’t have to, Token. Nevertheless, when they don’t, productivity gains from technological improvement drop, not to mention aggregate demand as all that cash is taken out of the economy.

    Bruce contradicts himself on this point – AAPL earning interest on the cash is not productive investment if the banks reinvest in non-productive ventures. On first principles, if all companies which could be sources of productivity gains like AAPL aren’t investing, then their cash is ipso facto not going to be used for productivity gaining investments.

  41. Pedro

    “not to mention aggregate demand as all that cash is taken out of the economy”

    So it’s a pile of notes and coins in a Scrooge McDuck type vault is it?

  42. banz

    Pedro – So it’s a pile of notes and coins in a Scrooge McDuck type vault is it?

    Not even that, electronic digits in bank accounts.

  43. Pedro

    banz, I think you missed my point, which is that it is money in a bank and therefore is not sterilized in the way it would be if held ala Scrooge McDuck.

  44. banz

    Pedro, with the Trillions of debt circualting around the world, the Fed monetizing 85 billion a month, Japan gone full retard, the ECB having a good crack, forget sterilized, its just farkin digits on a statements. Look at this way, if Appl holds a 100 billion, who gives a shit, thats small potatoes.

  45. Pedro

    Umm, monty was fretting that AAPL’s bank account was a drag on AD. I was pointing out that is nonsense.

  46. banz

    Monty frets about boiling water. I actually agree with you Pedro, I am suggesting that money is not even paper anymore, just electronic digits.

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