Opinion

Lawrence Summers

Britain and the limits of austerity

Lawrence Summers
May 5, 2014 13:53 UTC

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 right agenda for the IMF

Lawrence Summers
Apr 7, 2014 12:57 UTC

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.

Ukraine: Don’t repeat past mistakes

Lawrence Summers
Mar 10, 2014 15:25 UTC

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.

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