Saturday, November 5, 2011

“Government should be embarked on a multiyear, substantial investment program in infrastructure.”

I can't say I'm a fan of Larry Summers, but at a talk at his alma mater he appears to be speaking common sense:
The United States needs additional government spending to create significant economic growth, and in so doing would face little risk of serious inflation, said Lawrence H. Summers ’75, the economist and former Obama administration adviser, in public remarks at MIT on Wednesday.

“No thoughtful person can look at the U.S. economy today and believe that the principal constraint on expansion of output and employment is anything other than the lack of demand experienced by firms,” Summers said. That is, not enough consumers in the country have sufficient spending power; government programs employing more people would change that, he asserted at the event, hosted by MIT’s Undergraduate Economics Association.

“If the private sector is either unable or unwilling to borrow and spend on a sufficient scale, then there is a substantial role for government in doing that,” added Summers, who also served as Treasury secretary in the Clinton administration. “That’s the right macroeconomics. It’s also common sense.”
Lawmakers in Washington are currently proposing new budget cuts. By contrast, Summers recommended, “government should be embarked on a multiyear, substantial investment program in infrastructure.”

Summers claimed that monetary policy — essentially control of interest rates — would normally by itself spur growth, by making it easier for businesses to borrow and spend. But with Federal Reserve rates near zero, that option is now impossible. “When the zero interest rate binds, everything works differently,” Summers said.

And while economic growth often produces inflation, Summers was skeptical that such an effect would occur soon.

“It’s possible that they will overdo it on expansion, and it’s possible that I will overdo it on my diet and be too thin,” quipped the sturdily built Summers. “But that would not be where a sensible person would place their principal worries.” 

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