Opinion

Lawrence Summers

This election, Obama is the wiser economic choice

Lawrence Summers
Oct 29, 2012 11:53 UTC

Even as our politicians disagree on a great deal, most experts can agree on the objectives of economic policy. The next president will not have succeeded in the economic area unless he accomplishes three things: Reestablishing economic growth at a rate that makes real reductions in unemployment possible. Placing the nation’s finances on a stable foundation by putting in place measures to assure that U.S. sovereign debt is declining relative to America’s wealth. Renewing the economy’s foundation in a way that can support steady growth in middle-class incomes over the next generation, along with work for all who want it.

Where are the candidates on these three issues? President Obama has recognized that the inadequacy of demand is the principal barrier to growth and has sought to bolster both public- and private-sector demand since becoming president. Recent work by the IMF has confirmed the premise of his policies: namely, that at a time when short-term interest rates are at zero, fiscal policies are especially potent. The president has also respected the independence of the Federal Reserve as it has sought to respond creatively to the challenge of increasing demand even with short-term interest rates zeroed out. And he has put the economy on track to nearly doubling exports over five years through a series of measures, such as increasing government support for exporters. He has made clear his commitment to taking advantage of current low interest rates to finance public investment and protect public-sector jobs, and to continue to promote US exports.

In contrast, Governor Romney supports immediate efforts to sharply reduce government spending even as economic slack remains and Congress—at the president’s behest—has already legislated the most draconian domestic discretionary spending cuts in history. Through some set of intellectual gymnastics, Mitt Romney concludes that a government purchasing a new weapon systems or the recipient of a tax cut buying luxury goods creates jobs, but spending on fixing schools and highways does not. He also seems comfortable involving himself in monetary policy, favoring a reduction in the supply of credit relative to current Fed policy. And his insistence that he will name China a currency manipulator on his first day as president, even before his appointees have moved into their offices, surely increases uncertainty by making a trade war possible.

President Obama has embraced the principles, though not all the details, of the famous Simpson-Bowles commission report on budget deficits. Like the large group of CEOs who made a major statement on deficit reduction last week, he insists that achieving sustainable finance means both containing spending (especially on entitlements) and raising revenue. The budget that he has put forward has been thoroughly audited by the Congressional Budget Office, and puts the U.S. debt-GDP ratio on a declining path within this decade. And he has made clear that in negotiations with willing partners, he is prepared to go beyond his current budget proposals to assure that debt is contained.

Governor Romney, in contrast, has not suggested even a partial approach to the budget that has enough detail for independent experts to fully evaluate. He has however insisted on the need for over a trillion dollars more military spending than was recommended by George Bush’s defense secretary, Robert Gates, and for 20 percent across-the-board tax cuts that independent estimates suggest would cost close to $5 trillion over the next decade. To offset these measures that have no counterparts in the president’s proposals, he has spoken of “closing loopholes” without naming any specific items. And he’s done so in the face of repeated demonstrations that even the elimination of every tax benefit for those with income over $200 thousand would raise far less than the totality of his proposals would cost.

Job #1 for the IMF: Stay the course and avoid lurches to austerity

Lawrence Summers
Oct 15, 2012 03:57 UTC

If the global economy was in trouble before the annual World Bank and IMF meetings in Tokyo this past weekend, it is hard to believe that it is now smooth sailing. Indeed, apart from the modest stimulus provided to the Japanese economy by all the official visitors to Tokyo, it’s not easy to see what of immediate value was accomplished.

The U.S. still peers over a fiscal cliff, Europe staggers forward preventing crises King Canute-style with fingers in the dyke but no compelling growth strategy, and Japan remains stagnant and content if it can grow at all. Meanwhile, each BRIC is an unhappy story in its own way, with financial imbalances impeding growth in the short run and deep problems of corruption and demography casting doubt on long-run prospects.

In much of the industrial world, what started as a financial problem is becoming a deep structural problem. If growth in the United States and Europe had been maintained at its average rate from 1990 to 2007, GDP would be between 10 and 15 percent higher today and more than 15 percent higher by 2015 on realistic projections. Of course this calculation may be misleading because global GDP in 2007 was inflated by the same factors that created financial bubbles.  Yet even if GDP was artificially inflated by 5 percentage points in 2007, output is still about $1 trillion short of what could have been expected in the U.S. and EU.  This works out to more than $12,000 for the average family.

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