Davos prescriptions for the U.S. economy

January 25, 2013

DAVOS, Switzerland – Get ready for a new elite consensus on the U.S. budget deficit. One of the functions of the World Economic Forum – decide for yourself whether this is a virtue or a vice – is to give the plutocrats a venue for figuring out their party line. Think of it as crowdsourcing for the 0.1 percent.

For a long time, the conventional wisdom among this crew has been that the deficit and the debt were the United States’ chief economic problems. That’s why I wasn’t surprised when Martin Sorrell, the head of the global communications giant WPP, referred to the deficit as the country’s most important economic issue at a breakfast discussion he moderated at the forum this week. The conversation was off the record, but when I asked Sorrell if I could quote his comment, he happily doubled down: Not only was the deficit the United States’ most important economic woe, it was the most important economic issue in the entire world.

“This is the world’s gray swan,” Sorrell told me, in a play on the idea of unpredictable, powerful “black swan” events, popularized by the financial scholar Nassim Nicholas Taleb.

Most of the panelists (disclosure: I was one of them) at the WPP conversation agreed with Sorrell – but that Davos consensus may be on the verge of shifting. One of the most convincing signs of that switch came from an interview I did here with Lawrence H. Summers, a Harvard University economist and a monthly columnist for Reuters.

Summers, as he put it himself, is hardly a radical – his resume includes stints as secretary of the Treasury, president of Harvard, and President Barack Obama’s chief economic adviser. He is also an academic economist in excellent standing: Summers was one of the youngest tenured professors at Harvard and a recipient in 1993 of the John Clark Bates Medal, which is awarded every two years to the best economist under 40.

Most importantly of all, when it comes to the deficit debate, Summers is a political protege of Robert E. Rubin, the Treasury secretary under President Bill Clinton whose hawkishness on the deficit was so iconic that it inspired the always quotable political maestro James Carville to muse that he wanted to be reincarnated as the bond market, because it was, in the Rubin world view, omnipotent, a characteristic to which Carville aspired.

All of which is to say that Summers is the closest the Davos set comes to the Delphic Oracle – 150 people were turned back from his event this week – and a historic deficit hawk in very good standing. That’s why Summers’ relatively dovish comments about U.S. deficit reduction should carry such clout.

Summers’ most important point was that economic policy is more like medical treatment than religion. It isn’t a dogma that should be cleaved to under every circumstance. Instead, it is a doctor’s black bag, whose particular instrument depends on the specific patient.

Viewed in that way, there is no contradiction between supporting a hawkish approach to U.S. government spending in the 1990s and a more expansionary bias today. The world has changed, so the right policy needs to be different, too.

Here is how Summers explained it: “In 1993, here’s what the situation was: Capital costs were really high, the trade deficit was really big, and if you looked at a graph of average wages and the productivity of American workers, those two graphs lay on top of each other. So, bringing down the deficit, reducing capital costs, raising investment, spurring productivity growth, was the right and natural central strategy for spurring growth. That was what Bob Rubin advised Bill Clinton, that was the advice Bill Clinton followed, and they were right.”

But the fact that deficit cutting was the right prescription in the 1990s doesn’t necessarily make it the priority today.

“Today, the long-term interest rate is negligible, the constraint on investment is lack of demand, productivity has vastly outstripped wage growth, and the syllogism that reduced deficits spur investments and you’ll get more middle-class wages doesn’t work in the same way,” Summers said.

True believers in deficit reduction need not give way to complete despair – Summers insisted that deficit reduction was not “inconsequential.” It remained, he said, a “prudent defense” and a vital form of “economic hygiene.” Fail to deal with the deficit in the long run and the inevitable outcome is “economic catastrophe.”

The crucial difference, he argued, is that, in contrast to the 1990s, deficit reduction “does not constitute the basis for satisfactory growth strategy.” Instead, to get growth, particularly for the beleaguered middle class, you need what he gently calls “investment,” a category a budget hawk might simply term “spending.”

This conditional view of economic policy is a lovely example of the aphorism that “when the facts change, I change my mind; what do you do?” It is usually attributed to Keynes, but some pedants say the first recorded version was uttered by Paul Samuelson, the Nobel laureate economist who happens to be Summers’ uncle.

It is comfortable to take a religious view of economics – once you’ve chosen your creed, you never have to think again. But when it comes to deficits – and maybe a lot else besides – that may not be how the world works. Even in Davos, reality trumps ideology.

PHOTO: U.S. economist and Harvard University professor Lawrence Summers holds a news conference as he attends the Asian Financial Forum in Hong Kong January 14, 2013. REUTERS/Bobby Yip


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“When the facts change, I change my mind; what do you do?” Fine, but before such logic means anything, first there must consensus as to the “facts”. It seems that government has lost the ability it once had to tell a “want” from a “need” in terms of what it should do. Clearly America , and one of the most prosperous and productive nations ever, can afford it’s “needs”. But no society in recorded history has been able to afford all that it’s citizens “want”. To reach beyond one’s grasp is aspiration. To spend beyond one’s income is stupidity.

Mr. Sommers believes that “…to get growth, particularly for the beleaguered middle class, you need what he gently calls ‘investment,’ a category a budget hawk might simply term “spending.” It is a dangerous oversimplification to suggest that government “spending” without meaningful priorities is good when the clear and present result is an ever-increasing deficit all individuals and parties agree is “unsustainable”.

“Investing” tax dollars in America’s infrastructure should be an ongoing obligation of government with high priority on available funds. Such “investment” in a durable asset that improves everyone’s quality of life and the efficiency of national productivity.

So while to “prime the financial pump to that in a “down economy” is so prudent as to be common sense, to build mass transit that history shows will not be used by the productive in our society is imprudent. The difference boils down to competency and common sense, two things cxommonly and conspicuously missing from projects funded by the “public purse”.

One must question the need or effacy of government subsidy to for-profit medical “providers” such as hospitals and “Big Pharma”. The same can be said of unedmployment benefits beyond 26 weeks, which ecnourages people not to work or prepare themselves for different work in a permanently different economy.

One must look at the effect of good intent and make appropriate changes when it is not as intended or desired. All too often government continues doing the same things and expecting different results because no one is individually or meaningfully accountable.

Posted by OneOfTheSheep | Report as abusive

I suggest that a nation with newfound wealth of natural gas, high oil production and low taxation is well positioned to handle it’s debt!

Posted by donee | Report as abusive

So what is investment – more WMDs and weapons of war?

Posted by WJL | Report as abusive

Summers and most bona fide economists even Nobel Laureates in Economics have been saying this going back years to the time when Summers was President of Harvard. He’s repeated it several times since in public and in his more recent articles for Reuters.

For someone who has recently published a book on the American Plutocracy, most would expect a better informed discussion.

Posted by ptiffany | Report as abusive

“We welcome comments…”. For Reuters in the overall, true enough; but Ms. Freeland’s posts seem to habitually delay two to three days before any reader’s comments appear.

Not posting early and timely comments on this DEVOS conference until after it has adjourned has a considerable and adverse effect on comments timely submitted that are now largely irrelevant.

Posted by OneOfTheSheep | Report as abusive

It does seem that Mr. Summers’ talk was hardly a news flash. Saltwater economists in particular have pointed out for some time now that the recovery from this credit-induced recession is constrained by deleveraging, and delveraging in turn is constrained by anemic growth. And I certainly don’t think Mr. Summers just discovered this notion, but the man does seemed to have learned to be more politic since his days at Harvard.


Posted by maximillianwyse | Report as abusive

There has been a growing chorus of economic journalists suggesting that the only way to meaningfully bring down the debt and deficit is to spur growth. The argument for “investment” has mostly been implied, rather than overtly stated, until now. I see no reason to disagree. The problem I see is in the political reality, that deficit hawks have been warning the country about the terrors that await us caused by ballooning national debt, making the “investment” a political minefield that no one will want to touch.

Posted by smanchwhich | Report as abusive