Opinion

The Great Debate

Summers overplays stimulus, silent on zombie bank drag

By Benn Steil
The opinions expressed are his own.

Reuters invited leading economists and writers to reply to Larry Summers’ op-ed on his reaction to the debt ceiling deal. We will be publishing the responses here. Below is Steil’s reply. Here are responses from Laura Tyson, Russ Roberts, Donald Boudreaux, Robert Frank and James Pethokoukis as well.

Larry Summers expresses relief, cynicism, and anxiety in the wake of the debt deal. I second these emotions. Whereas those elected to the House on a hardline anti-tax, anti-spending platform had every right to press for their policies, threatening to push the country into a catastrophic default if the democratically elected Senate and president didn’t give them their way was reprehensible. Mind you, these congressmen were some of the same folks who backed the 2005 Bankruptcy Reform Act on the grounds that default was a form of moral turpitude.

I suspect that Larry still overestimates the stimulus (or “fiscal multiplier”) effects of temporary government spending and tax cuts, though his suggestions — in particular, extending the payroll tax cuts — are hardly outlandish. What concerns me is that the Administration believes, and Larry’s silence suggests he believes, that we’ve done all that needs to be done to fix the structural problems in the financial sector that are still weighing the economy down.

There are real dangers lurking in the breakdown of a major part of the credit transmission mechanism. Large corporations, like IBM, that can bypass the busted banking sector and issue securitized debt are clearly benefiting from record low borrowing costs. But small- and medium-sized companies have always been dependent on small- and medium-sized banks, whose balance sheets are still cluttered with the detritus of soured loans. These banks will not lend, except on vastly greater collateral and at much higher real interest rates than before the bust. Little recognized is that the firms, for their part, have for years relied overwhelmingly on real estate for their collateral, the value of which has been badly impaired or obliterated. So a zero Fed funds rate is doing little for them.

I still believe it was a mistake that TARP did not ultimately include an element to extract impaired assets from bank balance sheets — particularly those of smaller institutions that are the backbone of nonsecuritized business lending. Government equity injections are not enough; banks consider them politically toxic, and therefore have focused on disgorging them at the earliest opportunity.

It’s all about the jobs

By Laura Tyson
The opinions expressed are her own.

Reuters invited leading economists and writers to reply to Larry Summers’ op-ed on his reaction to the debt ceiling deal. We will be publishing the responses here. Below is Tyson’s reply. Here are responses from Benn Steil, Russ Roberts, Donald Boudreaux, Robert Frank and James Pethokoukis as well.

I share many of Professor Summers’ reactions to the debt limit deal — the so-called “Budget Control Act of 2011.” Like him, I am deeply relieved that the deal averted a default and its destabilizing effects on global financial markets and the global economy. Yet, also like him, I am cynical that the deal will lead to significant deficit reduction.

The deal claims to contain about $900 billion in spending cuts over the next decade. But the fanfare of the Tea Party notwithstanding, the deal does little more than confirm the low spending levels already negotiated for 2011 and 2012 and establish a cap for 2013 spending. Almost half of the $900 billion comes from cuts in security spending, primarily cuts in defense spending consistent with the anticipated reduction in US engagement in Iraq and Afghanistan.

Assessing the debt ceiling damage

By James Hamilton
The opinions expressed are his own.

Reuters invited leading economists and writers to reply to Larry Summers’ op-ed on his reaction to the debt ceiling deal. We will be publishing the responses here. Below is Hamilton’s reply. Here are responses from Laura Tyson, Benn Steil, Russ RobertsDonald BoudreauxRobert Frank and James Pethokoukis as well.

I much agree with the substance of Larry Summers’s observations on the recent debt deal.

Let me begin my thoughts by suggesting that the debt debate lumped together three issues that I regard as separate problems. There was first the immediate challenge of how the U.S. government was going to pay its bills for the rest of August. Second is the near-term need to bring unemployment down– we need to see more robust economic growth in order to get Americans back to work as quickly as possible. And third is the daunting challenge of putting U.S. fiscal policy on a sustainable long-run course– debt cannot continue to grow as a multiple of GDP, and something needed to change to ensure that it did not.

Take advantage of today’s low costs

By Robert H. Frank
The opinions expressed are his own.

Reuters invited leading economists to reply to Lawrence Summers’ op-ed on his reaction to the debt ceiling deal. We will be publishing the responses here. Below is Franks’s reply. Here are responses from Laura Tyson, Benn Steil, Russ Roberts, Donald Boudreaux and James Pethokoukis as well.

I’m in general agreement with Larry Summers’ piece. If it had been my column to write, I’d have been more emphatic about how much more important the unemployment problem is than the deficit problem. Deficits need to be reduced, yes, but not in the midst of a deep downturn. If we could put just half of the people who are either unemployed or underemployed back to work, for example, national income would be larger by more than ten times the interest we’re paying on the 2011 deficit. The extra income tax revenue alone would be enough to cover the interest on last year’s debt.

I’d also have hit harder on the claim by ostensible deficit hawks that extra spending right now would impoverish our grandchildren. Some of the most vivid and easily understood counterexamples involve infrastructure maintenance. According to the Nevada Department of Transportation, repairing a damaged 10-mile stretch of Interstate 80 would cost $6 million if we did the work today. But if we postpone repairs, weather and traffic will continue to damage the roadbed. If we wait just two years, the cost of bringing that same stretch of road up to par rises to $30 million. There are thousands of similar projects crying out to be done.

Entitlement reform would indicate maturity

By Russ Roberts
The opinions expressed are his own.

Reuters invited leading economists and writers to reply to Larry Summers’ op-ed on his reaction to the debt ceiling deal. We will be publishing the responses here. Below is Roberts’ reply.  Laura Tyson, James HamiltonDonald BoudreauxRobert Frank, Benn Steil and James Pethokoukis as well.

Summers begins with a refreshing instance of honesty about the effect of the debt deal:

Despite claims of spending reductions in the $1 trillion range, the actual agreements reached so far likely will have little impact on actual spending over the next decade.

Regretting raising the debt-ceiling

By Donald Boudreaux
The opinions expressed are his own.

Reuters invited leading economists and writers to reply to Larry Summers’ op-ed on his reaction to the debt ceiling deal. We will be publishing the responses here. Below is Donald Boudreaux’s reply. Here are responses from Laura Tyson, James Hamilton, Robert Frank, Russ Roberts, Benn Steil and James Pethokoukis as well.

Larry Summers’ cynicism about the new debt deal is justified. What, indeed, is the baseline from which $1.5 trillion is to be subtracted?

That there’s no clear answer to this question — and that there’s no serious effort to avoid the coming explosion of entitlement spending — drives home the truth that this deal really is nothing more than, as The Economist describes it, “a mishmash of expedient stop gaps and promises.”

Washington’s next challenge

By James Pethokoukis
The opinions expressed are his own.

Reuters invited leading economists to reply to Larry Summers’ ope-d on his reaction to the debt ceiling deal. We will be publishing the responses here. Below is Reuters Breakingviews columnist James Pethokoukis’ reply. Here are responses from Laura Tyson, James Hamilton, Robert Frank, Russ Roberts, Benn Steil and Donald Boudreaux as well.

Like Larry Summers, I have a “multifaceted reaction” to Washington’s debt ceiling and budget deal. In fact, I have the exact same multifaceted reaction, except driven by completely different rationales.

1. Like Summers, I feel relief — but not because the agreement averted default and avoided harsh austerity. While the package doesn’t fundamentally change America’s fatal fiscal trajectory, it keeps the legislative momentum headed in the right direction with a focus on reducing debt via spending cuts rather than tax increases.

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