Lawrence Summers http://blogs.reuters.com/lawrencesummers Tue, 10 Jun 2014 16:25:48 +0000 en-US hourly 1 http://wordpress.org/?v=4.2.5 Inequality is about more than money http://blogs.reuters.com/lawrencesummers/2014/06/09/inequality-is-about-more-than-money/ http://blogs.reuters.com/lawrencesummers/2014/06/09/inequality-is-about-more-than-money/#comments Mon, 09 Jun 2014 06:00:46 +0000 http://blogs.reuters.com/lawrencesummers/?p=506 Graduates from Columbia University's School of Business hold a sign as they cheer during university's commencement ceremony in New York

With Thomas Piketty’s book, Capital in the 21st Century, rising to number 1 on best-seller lists, inequality has become central to the public debate over economic policy. Piketty, and much of this discussion, focuses on the sharp increases in the share of income and wealth going to the top 1 percent, .1 percent and .01 percent of the population.

This is indeed a critical issue. Whatever the resolution of particular numerical arguments, it is almost certain that the share of income going to the top 1 percent of the population has risen by 10 percentage points over the last generation, and that the share of the bottom 90 percent has fallen by a comparable amount. The only groups that have seen faster income growth than the top 1 percent are the top .1 percent and top .01 percent.

Applications are seen at a rally held by supporters of the Affordable Care Act in Jackson, MississippiThis discussion helps push policy in constructive directions. Taxes can be reformed to eliminate loopholes and become more progressive, while also promoting a more efficient allocation of investment. In areas ranging from local zoning laws to intellectual property protection, from financial regulation to energy subsidies, public policy now bestows great fortunes on those whose primary skill is working the political system rather than producing great products and services. There is a clear case for policy measures to reduce profits from such rent- seeking activities, as a number of economists, notably Dean Baker and the late Mancur Olsen, have emphasized.

Unless one regards envy as a virtue, the key reason for concern about inequality is that lower- and middle-income workers have too little — not that the rich have too much. So in judging policies relating to inequality, the criterion should be what their impact will be on the middle class and the poor. On any reasonable reading of the evidence starting where the United States is today, more could be done to increase tax progressivity without doing any noticeable damage to the prospects for economic growth.

It is important to remember, however, that important aspects of inequality are unlikely to be transformed just by limited income redistribution. Consider two fundamental components of life: health and the ability to provide opportunity for children.

Barry Bosworth and his colleagues at the Brookings Institution have examined changes in life expectancy starting at age 55 for the cohort of people born in 1920 and the cohort born in 1940. They found that the richest men gained roughly six years in life expectancy, those in the middle class gained roughly four years, and those in the lowest part of the distribution gained two years. To put this in perspective, the elimination or doubling of cancer mortality would mean less than a four-year change in life expectancy.

Why these differences? They more likely have to do with lifestyle and variations in diet and stress than the ability to afford medical care — especially since the figures refer to relatively aged people, all of whom, once they reach 65, fall under Medicare.

Children look at models of giant whales at the exhibition at the Natural History museum in the western city of MuensterOver the last two generations, the gap in educational achievement between the children of the rich and the children of the poor has doubled. While the college enrollment rate for children from the lowest quarter of the income distribution has increased from 6 percent to 8 percent, the rate for children from the highest quarter has risen from 40 percent to 73 percent.

What has driven these trends? No doubt there are many factors. But a crucial one has to be that the average affluent child now receives  6,000 hours more enrichment activity — for example, being read to, taken to a museum, coached in a sport or other kind of stimulation provided by adults — than the average poor child, and this gap has greatly increased since the 1970s.

A famous literary spat between 1920s novelist F. Scott Fitzgerald and Ernest Hemingway has been boiled down over time to a succinct, if apocryphal, exchange. Fitzgerald: “The rich are different from you and me.” Hemingway’s retort: “Yes, they have more money.”

These observations on health and the ability to provide opportunity for children suggest that the differences between the rich and everyone else are not only about money but about things that are even more fundamental. If society is to become more just and inclusive, it will be necessary to craft policies that address the rapidly increasing share of money income going to the rich. But it is crucial to recognize that measures to support the rest of the population are at least equally important.

It would be a tragedy if this new focus on inequality and on great fortunes diverted attention from the most fundamental tasks of any democratic society — supporting the health and education of all its citizens.

 

PHOTO (TOP): Graduates from Columbia University’s School of Business hold up a sign, May 2012. REUTERS/Keith Bedford

PHOTO (INSERT 1): The federal government forms for applying for health coverage are seen at a rally held by supporters of the Affordable Care Act, widely referred to as “Obamacare,” outside the Jackson-Hinds Comprehensive Health Center in Jackson, Mississippi, October 4, 2013.  REUTERS/Jonathan Bachman

PHOTO (INSERT 2): Children look at models of giant whales at a museum exhibition. REUTERS/Ina Fassbender

]]>
http://blogs.reuters.com/lawrencesummers/2014/06/09/inequality-is-about-more-than-money/feed/ 11
Britain and the limits of austerity http://blogs.reuters.com/lawrencesummers/2014/05/05/britain-and-the-limits-of-austerity/ http://blogs.reuters.com/lawrencesummers/2014/05/05/britain-and-the-limits-of-austerity/#comments Mon, 05 May 2014 13:53:18 +0000 http://blogs.reuters.com/lawrencesummers/?p=494 The Bank of England is seen in the City of London

The British economy has experienced the most rapid growth in the G7 over the last few months. It increased at an annual rate of more than 3 percent in the last quarter — even as the U.S. economy barely grew, continental Europe remained in the doldrums and Japan struggled to maintain momentum in the face of a major new valued added tax increase.

Many have seized on Britain’s strong performance as vindication of the austerity policy that Britain has followed since 2010, and evidence against the secular stagnation idea that lack of demand is a medium-term constraint on growth in the industrial world.

Interpreting the British strategy correctly is crucial because of the political stakes in Britain, the question of future British economic policy and, most important, because the British experience influences economic policy debates around the globe. Unfortunately, when properly interpreted, the British experience refutes the austerity advocates and confirms John Maynard Keynes’s warning about the dangers of indiscriminate budget cutting during an economic downturn.

A protester holds a placard during a rally in Trafalgar Square in central LondonStart with the British economy’s current situation. While growth has been rapid recently, this is only because of the depth of the hole that Britain dug for itself. While the U.S. gross domestic product is now well above its pre-crisis peak, in Britain GDP remains below previous peak levels and even short of levels predicted when austerity policies were implemented. Not surprisingly given this dismal record, the debt to GDP ratio is now nearly 10 percentage points higher than forecast, and the date when budget balance is predicted has been pushed back to the end of the decade.

The common excuse offered for Britain’s poor performance is its dependence on financial services. Yet the New York metropolitan area, far more dependent on financial services than Britain, has seen GDP comfortably outstrip its previous peak. Though the euro area has performed poorly, even a casual look at trade statistics confirms that this cannot account for most of Britain’s poor growth.

The U.S. economy grew at a rate of 9 percent for a number of years after the trough of the Great Depression in 1933. Such rapid growth in peacetime is unheard of in U.S. history. Why did it happen? Only because of the depth of the Depression. No one has ever taken the pace of the U.S. recovery from the Great Depression as any validation of the austerity policies that helped create it. Similarly, part of the story of British growth is that it is simply catching up after a major crisis caused a huge output gap to develop.

History shows that deeper recessions are followed by stronger recoveries. For example, the New York metropolitan area, though falling relative to the rest of the country in the 2008 fiscal collapse, enjoyed more rapid growth after.

Two additional points about Britain’s growth require emphasis. First, the acceleration in growth has less to do with austerity spurring growth than with a slowdown in the pace at which austerity is imposed. Whether one looks at the deficit itself, or the various structural deficit measures advanced by local and international organizations, the pace of fiscal contraction has slowed over the last two years. Slowing fiscal contraction means the decrement to growth caused by fiscal policy is becoming more attenuated.

All things being equal, this would be expected to produce more favorable growth performance. Ironically, the greater the fiscal multiplier is, the greater would be the predicted turnaround when the pace of contraction slowed. So the turnaround in growth over the last 18 months is as much evidence against austerity as it is pro-austerity.

Demonstrators protest outside the Houses of parliament in central LondonSecond, in the face of deficit reduction’s potential damage to demand and economic growth, the British government has been forced to introduce a number of extraordinary measures to support lending. Most significant is the so-called Help to Buy program that gives low teaser rate mortgages to some households and guarantees the mortgages of others so they can put only 5 percent down. There are also special programs to reward banks for lending to small business and involve the central bank in export finance.

Especially in the case of Help to Buy, which manages to encompass most of the sins of the U.S. government-sponsored enterprises, all these programs are highly problematic. The austerity program’s stated goal was to improve confidence in Britain as a sovereign credit. Yet, guaranteeing mortgages en masse is actually creating a huge potential government liability, as do other loan guarantee programs.

In addition, subsidized credit for mortgages risks recreating real estate bubbles — house prices in London have increased much faster than GDP over the last year. And of course, programs that benefit homeowners rather than renters have perverse distributional consequences.

Britain’s growth then reflects a combination of the depth of the hole it found itself in, the moderation in the trend toward deeper and deeper austerity and the effects of possibly creating a bubble through government loans.

It may still be better for the citizens of Britain than any alternative. But it certainly should not be seen as any kind of inspiration to other countries.

 

PHOTO (TOP): The Bank of England is seen in the City of London. August 7, 2013. REUTERS/Toby Melville

PHOTO (INSERT 1): A protester holds a placard during a rally in Trafalgar Square in central London, May 1, 2013. REUTERS/Toby Melville

PHOTO (INSERT 2): Demonstrators protest outside the Houses of parliament in central London, March 21, 2012. REUTERS/Paul Hackett

]]>
http://blogs.reuters.com/lawrencesummers/2014/05/05/britain-and-the-limits-of-austerity/feed/ 2
The right agenda for the IMF http://blogs.reuters.com/lawrencesummers/2014/04/07/the-right-agenda-for-the-imf/ http://blogs.reuters.com/lawrencesummers/2014/04/07/the-right-agenda-for-the-imf/#comments Mon, 07 Apr 2014 12:57:14 +0000 http://blogs.reuters.com/lawrencesummers/?p=477

The world’s finance ministers and central bank governors will gather in Washington this week for the twice yearly meetings of the International Monetary Fund. Though there will not be the sense of alarm that dominated these meetings after the financial crisis, the unfortunate reality is that the global economy’s medium-term prospects have not been so cloudy for a long time.

The IMF in its current World Economic Outlook essentially endorses the secular stagnation hypothesis — noting that the real interest rate necessary to bring about enough demand for full employment has declined significantly and is likely to remain depressed for a substantial period. This is evident because inflation is well below target throughout the industrial world and is likely to decline further this year.

Without robust growth in industrial world markets, growth in emerging markets is likely to subside — even without considering the political challenges facing countries as diverse as Brazil, China, South Africa, Russia and Turkey.

Facing this inadequate demand, the world’s key strategy is easy money. Base interest rates remain essentially at floor levels across the industrial world and central banks signal that they are unlikely to increase anytime soon. Though the United States is tapering quantitative easing, Japan continues to ease on a large scale and Europe seems to be moving closer to starting it.

This all is better than the tight money policy of the 1930s that made the Great Depression great. But it is highly problematic as a dominant growth strategy.

We do not have a strong basis for assuming that reductions in interest rates nominal or real from very low levels will have a major impact on spending decisions. We do know that they strongly encourage leverage, that they place pressure on return-seeking investors to take increased risk, that they inflate asset values and reward financial activity.

The spending they induce tends to come at the expense of future demand. We cannot confidently predict the ultimate results of the unwinding of massive central bank balance sheets on markets — or on the confidence of investors. A strategy of indefinitely sustained easy money leaves central banks dangerously short of response capacity when and if the next recession comes.

A proper growth strategy would recognize that an era of low real interest rates offers opportunities as well as risks. It should focus on the promotion of high-return investments, rather than seeking to encourage investments that businesses find unworthy at current rock-bottom rates.

This strategy would have a number of elements. In the United States, the case for substantial investment promotion is overwhelming. Increased infrastructure spending would likely reduce burdens on future generations. Not just by spurring growth, but by expanding the economy’s capacity and reducing deferred maintenance obligations. As just one example: Can it possibly be rational for the 21st-century U.S. air traffic control system to rely on vacuum tubes and paper tracking of flight paths? Equally important, government could do much at no cost to promote private investment — including authorizing oil and natural gas exports, bringing clarity to the future of corporate taxes and moving forward on trade agreements that open up foreign markets.

With Tokyo’s increase of the value-added tax on April 1, Japan is now engaged in a major fiscal contraction. Yet it is far from clear whether last year’s progress in reversing deflation is durable or a reflection of one-off exchange rate movements. A return to stagnation and deflation could rapidly call its solvency into question. Japan takes a dangerous risk if it waits to observe the consequences before enacting new fiscal and structural reform measures to promote spending.

Europe has moved back from the brink. Defaults or devaluations now look like remote possibilities. But no strategy for durable growth is yet in place and the slide toward deflation continues. Strong actions are imperative to restore the banking system to the point where it can be a conduit for a robust flow of credit as well as measures to promote demand in the periphery nations where competitiveness challenges remain.

If emerging markets capital inflows fall off substantially, and they move further toward being net exporters, it is hard to see where the industrial world can take up the slack. So reform measures to bolster capital flows and exports to emerging markets are essential. These include, most importantly, political steps to reassure against populist threats in a number of countries and provide investor protection and backstop finance.

In this regard, the U.S. Congress’s passage of IMF authorization is crucial. Creative consideration should also be applied in mobilizing the trillions of dollars in public assets held by central banks and sovereign wealth funds, largely as safe liquid assets, to promote growth.

In an interdependent global economy, the collective impact of all these measures is likely to be substantially greater than the sum of their individual effects. In similar fashion, the consequences of national policy failures are likely to cascade.

That is why a global growth strategy framed to resist secular stagnation rather than simply muddle through with the palliative of easy money should be this week’s agenda.

 

PHOTO (TOP): International Monetary Fund Managing Director Christine Lagarde gestures as she speaks about the global economy at the Johns Hopkins School of Advanced International Studies in Washington, April 2, 2014. REUTERS/Kevin Lamarque 

PHOTO (INSERT): Federal Reserve Chairman Janet Yellen (L) meets with International Monetary Fund Managing Director Christine Lagarde during the opening session of the G20 Finance Ministers and Central Bank Governors meeting in Sydney, February 22, 2014. REUTERS/Jason Reed

]]>
http://blogs.reuters.com/lawrencesummers/2014/04/07/the-right-agenda-for-the-imf/feed/ 4
Ukraine: Don’t repeat past mistakes http://blogs.reuters.com/lawrencesummers/2014/03/10/ukraine-dont-repeat-past-mistakes/ http://blogs.reuters.com/lawrencesummers/2014/03/10/ukraine-dont-repeat-past-mistakes/#comments Mon, 10 Mar 2014 15:25:42 +0000 http://blogs.reuters.com/lawrencesummers/?p=463

The events in Ukraine have now made effective external support for successful economic and political reform there even more crucial. The world community is rising to the occasion, with concrete indications of aid coming not just from the International Monetary Fund and other international financial institutions but also the United States, the European Union and the G20.

At one level, the Ukraine situation is unique — particularly the geopolitical aspects associated with Russia’s presence in Crimea and the issues raised by Ukraine’s strategically sensitive location between Russia and Europe.

At a broader level, the world community has seen many examples over the last generation where an illegitimate, or at least highly problematic, government was brought down and the world community sought to support economic reform and a new, presumably more democratic and legitimate one. Think of the transitions after the Berlin Wall fell or the Arab Spring.

As a broad generalization, the support efforts have been constructive but the results have often fallen short of the global community’s aspirations. The Marshall Plan metaphor has been invoked close to a dozen times in the last quarter century. None was as successful as the original. It is true that well-functioning institutions cannot be imposed from the outside — countries and their peoples shape their own destinies. But experience does provide important lessons for the design of support programs.

Five lessons stand out.

First, immediate impact is essential. New governments will not last unless they deliver results that are felt on the ground. Conditions on assistance need to recognize political as well as economic reality. Resources must be delivered in a front-loaded way, where their impact is immediately visible.

For example, strengthening safety net programs and support for new businesses need to lead — not lag — the removal of subsidies. Too often the international community sets economically rational conditions that are more than the political process can bear, then fails to move aid and blames the country for its bad policies. This is surely a time for political concerns to trump technocrats’ fears.

Second, avoid “Potemkin money.” A combination of media excitement, recipients’ desire to maximize support and donors’ desire to appear visionary usually leads to the announcement of huge assistance packages, based on indiscriminate totaling of all project flows of all kinds. The result is disappointment followed by disillusionment, as recipients realize that not all assistance can materialize quickly or meet urgent local needs.

Remember, the Marshall Plan was announced without any figures or fact sheets. The goal for Ukraine should be to under-promise and over-perform in the months ahead.

Third, be realistic about debts. Ukraine’s debt-income ratio is relatively low compared to the crisis countries of the European periphery, so encouraging full debt service may have benefits in terms of financial stability and maintaining existing fund flows that make it worthwhile. However, in light of the fact that private creditors of Ukraine have for years received risk premiums of 500 basis points or more suggests careful consideration should be given to rescheduling or restructuring Ukraine’s debts.

As with Poland after the Berlin Wall fell in 1989, debt relief can provide a strong signal of political support. In working through past debts, though, the international community needs to be careful about setting the stage for future problems by relying on debt finance rather than direct grants for projects where the benefits are non-pecuniary or the costs continuing.

Fourth, honest management is as critical as prudent policy. Traditionally, international financial institutions’ focus has been on imposing conditions that go to the quality of policy. It is now understood, however, that the diversion and theft of public resources is a major source of poor economic performance. The international community should do everything it can to recover ill-gotten gains from former Ukrainian officials and put in place procedures that will prevent future fund diversions. The benefits here are both significant in narrow economic terms and salient in political terms.

Fifth, countries need to pursue broad polices in a way that benefits Ukraine. For example, Congress needs to bring the United States along with the rest of the world and approve full IMF funding if Washington is to maintain its leadership role with respect to financial crises. Ukraine’s economic strength and autonomy would also improve if the United States were to permit natural gas and crude oil exports.

Ukraine is far closer to Europe than to America, so it has an even greater stake in Europe prospering and becoming a growing market for its exports. The most natural north star for Ukrainian economic reformers is the possiblity of an ever closer partnership with the European Union.

Respect for these principles does not insure success. But failure to heed them almost insures failure. Given what is at stake with Russia in Crimea, the stakes in what we are trying to accomplish are immense.

PHOTOS: Pro-Russian demonstrators take part in a rally in the Crimean town of Yevpatoria March 5, 2014. Russia rebuffed Western demands to withdraw forces in Ukraine’s Crimea region to their bases on Wednesday amid a day of high-stakes diplomacy in Paris aimed at easing tensions over Ukraine and averting the risk of war. REUTERS/Maks Levin

An armed man, believed to be a Russian soldier, stands outside the civilian port in the Crimean town of Kerch March 3, 2014. Russia has started a build-up of armoured vehicles on the Russian side of a narrow stretch of water between Russia and the Ukrainian region of Crimea, Ukrainian border guards said on Monday. The words read: “Port Crimea”. REUTERS/Thomas Peter

 

]]>
http://blogs.reuters.com/lawrencesummers/2014/03/10/ukraine-dont-repeat-past-mistakes/feed/ 5
On inequality http://blogs.reuters.com/lawrencesummers/2014/02/17/on-inequality/ http://blogs.reuters.com/lawrencesummers/2014/02/17/on-inequality/#comments Mon, 17 Feb 2014 04:29:42 +0000 http://blogs.reuters.com/lawrencesummers/?p=446

Inequality has emerged as a major economic issue in the United States and beyond.

Sharp increases in the share of income going to the top 1 percent of earners, a rising share of income going to profits, stagnant real wages, and a rising gap between productivity growth and growth in median family income are all valid causes for concern. A generation ago, it could have been plausibly asserted that the economy’s overall growth rate was the dominant determinant of growth in middle-class incomes and progress in reducing poverty. This is no longer plausible. The United States may well be on the way to becoming a Downton Abbey economy.

So concern about inequality and its concomitants is warranted. Issues associated with an increasingly unequal distribution of economic rewards will likely be with us long after the cyclical conditions have normalized and budget deficits finally addressed.

Those who condemn President Barack Obama’s concern about inequality as “tearing down the wealthy” and un-American populism have, to put it politely, limited historical perspective. Consider a sampling of past presidential rhetoric.

President Franklin D. Roosevelt, talking about the financial industry in his first Inaugural Address in 1933, said “Practices of the unscrupulous money changers stand indicted in the court of public opinion …. They know only the rules of a generation of self-seekers. They have no vision and when there is no vision the people perish.”

By his re-election campaign in 1936, this had become: “We had to struggle with the old enemies of peace — business and financial monopoly, speculation, reckless banking. … They are unanimous in their hate for me — and I welcome their hatred.”

President Harry S. Truman later observed, “The Wall Street reactionaries are not satisfied with being rich….These Republican gluttons of privilege are cold men. … They want a return of the Wall Street economic dictatorship.”

John Kennedy, dismayed by a steel price increase in 1962, privately cursed the steel executives — though the quote quickly became public — and had FBI agents storm into corporate offices and subpoena business and personal records. He very likely ordered the Internal Revenue Service to audit steel executives’ personal tax returns. President Richard Nixon also turned to the tax authority, announcing in 1973 that he had “ordered the IRS to begin immediately a thoroughgoing audit of the books of companies which raised their prices more than 1.5 percent above the January ceiling.”

President Bill Clinton, in a major economic speech of his 1992 campaign, complained, “America is evolving a new social order, more unequal, more divided, more impenetrable to those who seek to get ahead. Although America’s rich got richer … the country did not … the stock market tripled but wages went down.”

Many more examples can be cited to demonstrate that it is neither unusual nor un-American to be concerned about income inequality, the concentration of wealth, or the influence of financial interests. Given the public’s frustration with stagnant incomes and an increasing body of evidence linking inequality to reduced equality of opportunity, reduced demand for goods and services and increased alienation from public institutions, demands for action are reasonable.

The challenge is in knowing what to do. If total income were independent of efforts at redistribution, the case for reducing incomes at the top and transferring the proceeds to those in the middle and at the bottom would be compelling. Unfortunately this is not the case. Technological changes and globalization, for example, have made it possible for those with great entrepreneurial talents to operate faster and on a larger scale than ever before — and gather profits on an unprecedented scale.

It is easy to conceive of policies that would have reduced the earning power of a Bill Gates or a Mark Zuckerberg by making it more difficult to start, grow and globalize businesses. But it is far harder to see how such policies would raise the incomes of the remaining 99.9 percent, and such polices would surely hurt them as consumers.

It is true that there has been a dramatic increase in the number of highly compensated people in finance over the last generation. But recent studies reveal that most of the increase has come as the value of assets has increased — asset management fees as a percentage of assets remained roughly constant. Perhaps some policy could be found that would reduce these fees, but the beneficiaries would be the owners of financial assets — a group heavily tilted towards the very wealthy.

So it is not enough to identify policies that reduce inequality. To be effective they must also raise the incomes of the middle class and the poor. Tax reform has a major role to play here. Apart from its adverse effects on economic efficiency, our current tax code allows a far larger share of the income of the rich than the poor or middle class to escape taxation.

For example, last year’s increase in the stock market represented an increase in wealth of about $6 trillion — with the lion’s share going to the very wealthy. The government is unlikely to collect as much as 10 percent of this figure given capital gains exemption, the ability to defer unrealized capital gains, and the absence of any tax on gains on assets passed on at death.

Another example is provided by our corporate tax system. Because of various loopholes the ratio of corporate tax collections to the market value of U.S. corporations is at a near record low.

Then there is the reality that the estate tax can be substantially avoided by those prepared to plan and seek sophisticated advice. Closing loopholes that only the wealthy can enjoy would enable targeted tax measures like the Earned Income Tax Credit, which raise the incomes of the poor and middle class more than dollar for dollar by incentivizing working and saving.

It is ironic that those who profess the most enthusiasm for market forces are least enthusiastic about curbing tax benefits for the wealthy. Sooner or later inequality will be addressed. Much better that it be done by letting market forces operate and then working to improve the result than by seeking to thwart their operation.

PHOTOS: A homeless man snoozes on a bench in a park in Washington October 21, 2010. REUTERS/Molly Riley 

A member of the Occupy Wall Street movement shows his sign as he protests on 5th Avenue while marching through the upper east side of New York October 11, 2011. REUTERS/Shannon Stapleton

]]>
http://blogs.reuters.com/lawrencesummers/2014/02/17/on-inequality/feed/ 16
What to do about secular stagnation? http://blogs.reuters.com/lawrencesummers/2014/01/06/what-to-do-about-secular-stagnation/ http://blogs.reuters.com/lawrencesummers/2014/01/06/what-to-do-about-secular-stagnation/#comments Mon, 06 Jan 2014 12:42:24 +0000 http://blogs.reuters.com/lawrencesummers/?p=409 Last month in this space I argued that we may be in a period of secular stagnation in which sluggish growth, output and employment at levels well below potential, and problematically low real interest rates might coincide for quite some time to come. Since the beginning of this century U.S. GDP growth has averaged less than 1.8 percent per year. Right now the economy is operating at nearly 10 percent — or more than $1.6 trillion — below what was judged to be its potential path as recently as 2007. And all this is in the face of negative real interest rates out for more than 5 years and extraordinarily easy monetary policies.

It is true that even some forecasters who have had the wisdom to remain pessimistic about growth prospects for the last few years are coming around to more optimistic views about growth in 2014, at least in the U.S. This is encouraging, but optimism should be qualified by the recognition that even optimistic forecasts show output and employment remaining well below previous trends for many years. More troubling even with the current high degree of slack in the economy and wage and price inflation slowing, there are increasing signs of eroding credit standards and inflated asset values. If we were to enjoy several years of healthy growth with anything like current credit conditions, there is every reason to expect a return to the kind of problems we saw in 2005-2007 long before output and employment returned to trend or inflation accelerated.

The secular stagnation challenge then is not just to achieve reasonable growth, but to do so in a financially sustainable way. What then is to be done? Essentially three approaches compete for policymakers’ attention. The first emphasizes what is seen as the economy’s deep supply side fundamentals — the skills of the workforce, companies’ capacity for innovation, structural tax reform, and assuring the long-run sustainability of entitlement programs. All of this is intuitively appealing, if politically difficult, and would indeed make a great contribution to the economy’s health over the long run. But it is very unlikely to do much over the next 5 to 10 years. Apart from obvious lags like those with which education operates, there is the reality that our economy is constrained by lack of demand rather than lack of supply. Increasing our capacity to produce will not translate into increased output unless there is more demand for goods and services. Training programs or reform of social insurance, for instance, may affect which workers get jobs, but they will not affect how many get jobs. Indeed measures that raised supply could have the perverse effect of magnifying deflationary pressures.

The second strategy that has dominated U.S. policy in recent years has been lowering relevant interest rates and capital costs as much as possible and relying on regulatory policies to assure financial stability. No doubt the economy is far stronger and healthier now than it would be in the absence of these measures. But a growth strategy that relies on interest rates significantly below growth rates for long periods of time is one that virtually insures the emergence of substantial financial bubbles and dangerous buildups in leverage. It is a chimera to hold out the hope that regulation can allow the growth benefits of easy credit to come without the costs. Increases in asset values and increased ability to borrow stimulate the economy and are precisely the proper concern of prudential regulation.

The third approach — and the one that holds the most promise — is a sustained commitment of policy to raising the level of demand at any given level of interest rates through policies that restore a situation where reasonable growth and reasonable interest rates can coincide. To start, this means ending the disastrous trends towards less and less government spending and employment each year, and taking advantage of the current period of economic slack to renew and build out our infrastructure. In all likelihood, if the government had invested more over the last 5 years, our debt burden relative to income would be lower today given the way in which economic slack has hurt the economy’s long-run potential, so it would not have imposed any burden on future taxpayers.

Raising demand also means seeking to spur private spending. There is much that can be done in the energy sector to unleash private investment on both the fossil fuel and renewable sides. Regulation that requires the more rapid replacement of coal-fired power plants will increase investment and spur growth as well as help the environment. And it is essential to insure in a troubled global economy that a widening trade deficit does not excessively divert demand from the U.S. economy.

Secular stagnation is not an inevitability. With the right policy choices, we can have both reasonable growth and financial stability. But without a clear diagnosis of our problem and a commitment to structural increases in demand, we will be condemned to oscillating between inadequate growth and unsustainable finance. We can do better.

PHOTO: Morning commuters walk past the New York Stock Exchange August 20, 2012. REUTERS/Brendan McDermid 

]]>
http://blogs.reuters.com/lawrencesummers/2014/01/06/what-to-do-about-secular-stagnation/feed/ 22
On secular stagnation http://blogs.reuters.com/lawrencesummers/2013/12/16/on-secular-stagnation/ http://blogs.reuters.com/lawrencesummers/2013/12/16/on-secular-stagnation/#comments Mon, 16 Dec 2013 12:31:55 +0000 http://blogs.reuters.com/lawrencesummers/?p=391 Some time ago speaking at the IMF, I joined others who have invoked the old idea of secular stagnation and raised the possibility that the American and global economies could not rely on normal market mechanisms to assure full employment and strong growth without sustained unconventional policy support. My concern rested on a number of considerations. First, even though financial repair had largely taken place four years ago, recovery since that time has only kept up with population growth and normal productivity growth in the United States, and has been worse elsewhere in the industrial world. Second, manifestly unsustainable bubbles and loosening of credit standards during the middle of the last decade, along with very easy money, were sufficient to drive only moderate economic growth. Third, short-term interest rates are severely constrained by zero lower bound and there is very little scope for further reductions in either term premia or credit spreads, and so real interest rates may not be able to fall far enough to spur enough investment to lead to full employment. Fourth, in such a situation falling wages and prices or inflation at slower-than-expected rates is likely to worsen economic performance by encouraging consumers and investors to delay spending, and to redistribute income and wealth from higher spending debtors to lower spending creditors.

The implication of these considerations is that the presumption that runs through most policy discussion — that normal economic and policy conditions will return at some point — cannot be maintained. The point is demonstrated by the Japanese experience, where gross domestic product today is less than two-thirds of what most observers predicted a generation ago, even as interest rates have been at zero for many years. It bears emphasis that Japanese GDP disappointed less in the five years after the bubbles burst at the end of the 1980s than the United States has since 2008. GDP today in the United States is more than 10 percent below what was predicted before the financial crisis.

If secular stagnation concerns are relevant to our current economic situation, there are obviously profound policy implications that I will address in a subsequent column. Before turning to policy, though, there are two central issues regarding the secular stagnation thesis that have to be addressed.

Is not a growth acceleration in the works in the U.S. and beyond? There are certainly grounds for optimism, including the recent flow of statistics, strong stock markets, and the end at last of sharp fiscal contraction. Fears of secular stagnation were widespread at the end of World War Two and proved utterly false, and today secular stagnation should be viewed as a contingency to be insured against, not a fate to which we are consigned. Yet, it should be recalled that the achievement of escape velocity has been around the corner in consensus forecasts for several years now and we have seen, as Japan did in the 1990s, several false dawns. More fundamentally, even if the economy accelerates next year, this provides no assurance that it is capable of sustained growth along with normal real interest rates. Europe and Japan are forecast to have growth at levels well below the United States. Throughout the industrial world, inflation is below target levels and shows no signs of accelerating, suggesting a chronic demand shortfall.

Why should not the economy return to normal after the effects of the financial crisis are worked off? Is there a basis for believing that equilibrium real interest rates have declined? There are many a priori reasons why the level of spending at any given level of safe short-term interest rates is likely to have declined. These include (i) reduced investment demand, due to slower labor force growth and perhaps slower productivity growth; (ii) reduced consumption demand, due to a sharp increase in the share of income held by the very wealthy and the rising share of income accruing to capital; (iii) on a global basis increased savings and increased risk aversion, as governments accumulate trillions in liquid reserves; (iv) the continuing effects of the financial crisis, including greater costs of financial intermediation, higher risk aversion, and continuing debt overhangs; (v) continuing declines in the cost of durable goods, especially those associated with information technology, meaning that the same level of saving purchases more capital every year; and (vi) the observation that any given real interest rate translates into a higher after tax real interest rate than it did when inflation rates were higher. Logic is supported by evidence. For many years now indexed bond yields have trended downwards. Indeed, U.S. real rates are substantially negative at a five-year horizon.

Some have suggested that a belief in secular stagnation implies the desirability of bubbles to support demand. This idea confuses prediction with recommendation. It is of course far better to support demand by supporting productive investment or highly valued consumption than by artificially inflating bubbles. On the other hand, it is only rational to recognize that low interest rates raise asset values and drive investors to take greater risks, making bubbles more likely. The risk of financial instability provides yet another reason why preempting structural stagnation is so profoundly important.

 

 

]]>
http://blogs.reuters.com/lawrencesummers/2013/12/16/on-secular-stagnation/feed/ 13
The lessons from Obamacare’s flawed Web launch http://blogs.reuters.com/lawrencesummers/2013/11/11/the-lessons-from-obamacares-flawed-web-launch/ http://blogs.reuters.com/lawrencesummers/2013/11/11/the-lessons-from-obamacares-flawed-web-launch/#comments Mon, 11 Nov 2013 10:11:53 +0000 http://blogs.reuters.com/lawrencesummers/?p=372 As the president has recognized, the failure of his administration to deliver a functioning website that Americans can use to enroll in Obamacare represents an inexcusable error. Having succeeded after more than a century of failed efforts in achieving the progressive dream goal of legislating universal health insurance in America, it is tragic to be falling short on the mundane task of allowing Americans to actually enroll in the healthcare exchanges. Even if the goal of getting the health insurance exchanges working by November 30 is achieved, and this cannot be regarded by objective observers as a certainty, a shadow has been cast on the core competence of the federal government.

What should be learned from this episode? It is too soon to know with confidence, but worth reaching some preliminary judgments while the issue is front of mind.

At a basic level the implications go to public management. The dismal track record of the implementation of large-scale information technology initiatives, even in rigorous and focused corporate environments, points up their difficulty. Unexpected obstacles always arise, deadlines are usually missed, and budgets are usually overrun. Maximizing the prospect of success requires providing for slack in the schedule and the budget, structuring projects with very clear accountabilities and frequent checkpoints, and assigning oversight responsibility to people with extensive IT experience, rather than general managers with programmatic commitments.

Success also requires some trusting by more verifying. A homeowner who hires a general contractor to build an extension to his house, discusses the specifications, and then goes away for 6 months is usually unhappy with the result. The same is true for public managers who hire contractors to perform essential tasks and then trust them and fail to rigorously oversee every step.

An additional requisite for success is steadiness and realism in the face of difficulty. Once a project gets off track, there is an overwhelming temptation for everyone involved to circle the wagons and promise rapid repair so as to hold critics at bay. Yet the right response to failure is to surface problems as rapidly as possible and to move more deliberately and carefully, not more quickly. The best football teams stick to their playbooks even when they fall behind. So, too, when projects fall behind, it is important to mobilize new resources and management but not to overpromise with respect to how soon and how good a fix is possible. Overoptimism once will ultimately be forgotten and or forgiven. Repeated overoptimism should not and will not be excused.

These are old truths that those responsible for implementing Obamacare should surely have heeded. Yet, fairness requires recognizing that there is an equally important and in some ways more fundamental factor behind the problems in implementing Obamacare — the systematic effort of the president’s opponents to delegitimize and undermine the project.

Large-scale information technology projects in the private sector are hard enough with no organized constituency rooting for failure. It is no exaggeration to say that it has been the prophecy and the hope many of those responsible for funding the implementation of Obamacare, confirming the appointment of those who will do the job, and overseeing the results that the project will fail. They have been eager to seize on any problems, highlight any controversial judgments, and create an environment in which failure becomes the expectation.

It is disingenuous for those who stood ready to turn any regulatory detail into an attack ad to profess outrage when guidance was not provided during an election campaign. It is hypocritical for those who held up confirmations of key officials with responsibility for managing federal healthcare programs and whose behavior deterred many able people from coming into government to lash out at the incompetence of government management. And it is indefensible to refuse to appropriate money to carry out a program and then attack it for being under-resourced.

There is a danger here that goes far beyond delays in access to health insurance. The risk is of a vicious cycle developing in which poor government performance leads on the one hand to overly bold promises of repair, and on the other to reduced funding and support for those doing the work. This then leads to unmet expectations and disappointment, setting off the cycle again. In the end, government loses the ability to deliver for citizens and citizens lose respect for government. Our democracy is the loser.

PHOTO: A man looks over the Affordable Care Act (commonly known as Obamacare) signup page on the HealthCare.gov website in New York in this October 2, 2013 photo illustration.  REUTERS/Mike Segar 

]]>
http://blogs.reuters.com/lawrencesummers/2013/11/11/the-lessons-from-obamacares-flawed-web-launch/feed/ 13
Beyond the budget impasse http://blogs.reuters.com/lawrencesummers/2013/10/14/beyond-the-budget-impasse/ http://blogs.reuters.com/lawrencesummers/2013/10/14/beyond-the-budget-impasse/#comments Mon, 14 Oct 2013 11:48:46 +0000 http://blogs.reuters.com/lawrencesummers/?p=353 This month Washington is consumed by the impasse over reopening the government and raising the debt limit. It seems likely that this episode, like the 1995-96 government shutdowns and the 2011 debt limit scare, will be remembered mainly by the people directly involved. But there is a chance future historians will see today’s crisis as the turning point where American democracy was shown to be dysfunctional — an example to be avoided rather than emulated.

The tragedy is compounded by the fact that most of the substance being debated in the current crisis is only tangentially relevant to the major challenges and opportunities facing the United States. This is the case with respect to the endless discussions about the precise timing of continuing resolutions and debt limit extensions, or the proposals to change Congressional staff healthcare packages or cut a medical device tax that represents only about .015 percent of GDP.

More fundamental is this: current and future budget deficits are now a second order problem relative to other more pressing issues facing the American economy. Projections that there will be a major deficit problem are highly uncertain. And policies that indirectly address deficit issues by focusing on growth are sounder in economic terms and more plausible in political terms than the long-run budget deals with which much of the policy community is obsessed.

The latest Congressional Budget Office projection is that the Federal deficit will fall to 2 percent of GDP by 2015 and that a decade from now the debt-to-GDP ratio will be below its current level of 75 percent. While the CBO projects that under current law the debt-to-GDP ratio will rise over the longer term, the rise is not large relative to the scale of the U.S. economy. It would be offset by an increase in revenues or a decrease in spending of .8 percent of GDP for the next 25 years and 1.7 percent of GDP for the next 75 years.

These figures lie well within any reasonable confidence interval for deficit forecasts. The most recent comprehensive CBO evaluation found that, leaving aside any errors due to policy changes, the expected error in projections out only five years is 3.5 percent of GDP. Put another way, given the magnitude of forecast uncertainties there is a chance of close to 40 percent that with no new policy actions the ratio of debt-to-GDP will decline over 25 or 75 years.

Of course, debt problems could also be much worse than is now forecast.

But in most areas policymakers avoid strong actions without statistically compelling evidence. Few would favor action to curb greenhouse gas emissions without evidence establishing that substantial climate change is overwhelmingly likely. Yet it is conventional wisdom that urgent action must be taken to cut the deficit, even as prevailing short-run deficit forecasts suggest no problems and long-run forecasts are within margins of error.

To be sure, there are steps that matter profoundly for the long run that should be priorities today. Data from the CBO imply that an increase of just .2 percent in annual growth would entirely eliminate the projected long-term budget gap. Increasing growth, in addition to solving debt problems, would also raise household incomes, increase U.S. economic strength relative to other nations, help state and local governments meet their obligations and prompt investments in research and development.

Beyond the fact that spurring growth has a multiplicity of benefits, of which reduced federal debt is only one, there is the further aspect that growth-enhancing policies have more widely-felt benefits than measures that raise taxes or cut spending. Spurring growth is also an area where neither side of the political spectrum has a monopoly on good ideas. We need more public infrastructure investment, but we also need to reduce regulatory barriers that hold back private infrastructure. We need more investments in education, but also increases in accountability for those who provide it. We need more investment in the basic science behind the renewable energy technologies, but in the medium term we need to take advantage of the remarkable natural gas resources that have recently become available to the U.S. We need to assure that government has the tools to work effectively in the information age, but also to assure that public policy promotes entrepreneurship.

If even half the energy that has been devoted over the last five years to “budget deals” were devoted instead to “growth strategies” we could enjoy sounder government finances and a restoration of the power of the American example. At a time when the majority of the U.S. thinks that the country is moving in the wrong direction, and family incomes have been stagnant, a reduction in political fighting is not enough — we have to start focusing on the issues that are actually most important.

PHOTO: U.S. Senator Charles Schumer (D-NY) (L) and Senate Majority Leader Harry Reid (D-NV) address reporters at a news conference at the U.S. Capitol in Washington, October 12, 2013. REUTERS/Jonathan Ernst 

]]>
http://blogs.reuters.com/lawrencesummers/2013/10/14/beyond-the-budget-impasse/feed/ 36
A simple fix for the divisive U.S. corporate tax debate http://blogs.reuters.com/lawrencesummers/2013/07/08/a-simple-fix-for-the-divisive-u-s-corporate-tax-debate/ http://blogs.reuters.com/lawrencesummers/2013/07/08/a-simple-fix-for-the-divisive-u-s-corporate-tax-debate/#comments Mon, 08 Jul 2013 11:20:20 +0000 http://blogs.reuters.com/lawrencesummers/?p=347 No one is satisfied with the U.S. corporate tax system. From one perspective the main problem is that at a time when corporate profits are extraordinarily high relative to GDP, tax collections are very low relative to GDP. And many very successful companies pay little or nothing in taxes at a time when the budget deficit is a major concern and when hundreds of thousands of defense workers are being furloughed and lotteries are being held to determine which children Head Start can no longer afford to help. From another perspective, the main problem is that the United States has a higher corporate tax rate than any other major country and, unlike other countries, it imposes severe taxes on income earned outside its borders. Many argue that this unfairly burdens companies engaged in international competition, discourages the repatriation of profits earned abroad, and–because of the patterns of investment that result–benefits foreign workers at the expense of their counterparts.

These two perspectives on corporate taxes seem to point in opposite directions with respect to reform. The former perspective points towards the desirability of raising revenues by closing loopholes, whereas the latter perspective seems to call for a reduction in corporate tax burdens. Little wonder, then, that corporate tax reform debates are so divisive. Many can get behind the idea of “broadening the base and lowering the rate,” but consensus tends to collapse when the issue becomes the means to broaden the base. Indeed a principal objective of many business-oriented reformers seems to be narrowing the corporate tax base by reducing the taxation of foreign earnings through movement to a territorial system.

Where then should the debate go? Despite the tension between the critical perspectives on corporate tax reform, the current debate has landed us in so perverse a place that win-win reform is easy to achieve. The center of the issue is the taxation of global companies. Under current law U.S. companies are taxed on their foreign profits (with a credit for taxes paid to other governments) only when they repatriate these profits to the United States. Right now U.S. companies are holding nearly $2 trillion in cash abroad.  The companies argue, with some validity, that current rules burden them by making it expensive to bring money home without raising much revenue for the government because it has no claim against foreign profits that are not repatriated. They hope for and call for relief arguing that it will help them bring money home at a minimum for the benefit of their shareholders and possibly to increase investment.

The debate continues. The companies make their point while others rail against the idea that companies who have used what could politely be called aggressive accounting practices to locate income in low-tax jurisdictions should be given further relief. In the meantime, what is a corporate treasurer to do? With the possibility of some kind of relief looming, there is every reason to delay repatriating earnings to the United States even if the company has no good use for the cash abroad. And so the debate encourages exactly what everyone can agree should be avoided — corporate cash kept abroad to the detriment of companies and to no benefit for the American fisc.

A homely example makes the problem clear. Imagine a library where many books have been borrowed and are long overdue. There is a case for an amnesty to bring the books back and move on. There is a case for saying that rules are rules and fines must be paid. But the worst strategy is to keep indicating that an amnesty may come soon without ever introducing it. Yet something very similar is where we are in our corporate tax debate.

A clear and unambiguous commitment that there will be no rate reduction or repatriation relief for the next decade would be an improvement over the current situation because companies would know that they were going to have to pay taxes on their foreign profits if they wished to make them available to shareholders and would no longer have an incentive to delay.

But this would not be the best outcome. As a very general rule, any time tax rules are experienced by taxpayers as a substantial burden without generating substantial revenue for the government, improvement is possible. Having taxpayers be burdened less and pay more can make them better off and help the fisc. That is what should be done with corporate taxes. The U.S. should eliminate the distinction between repatriated and unrepatriated foreign corporate profits for U.S. companies and tax all foreign income (after allowance for taxes paid to other governments) at a fixed rate well below the current U.S. corporate rate — perhaps in the 15 percent range. A similar tax should be imposed on past accumulated profits held abroad.

Such a proposal could easily be designed to raise revenue relative to the current baseline, encourage the repatriation of funds to the United States, and reduce the competitive disadvantage faced by U.S. multinationals operating abroad. It is about as close to a free lunch as tax reformers will ever get.

PHOTO: A woman walks out of the Internal Revenue Service building in New York in this May 13, 2013 photo. REUTERS/Shannon Stapleton

]]>
http://blogs.reuters.com/lawrencesummers/2013/07/08/a-simple-fix-for-the-divisive-u-s-corporate-tax-debate/feed/ 13