In his December 15th Financial Times blog post, Larry Summers continues warming to the notion that the slow recovery stems from permanent structural problems and not a temporary Keynesian lull in demand. Presumably, then, optimal economic policy would maximize long-term private sector growth, rather than maximizing short-term growth at the expense of the long-term, in order to avoid permanent damage to the economy from a temporary lull in demand.
Summers blames a variety of structural problems for slower growth including slowing workforce growth that has been long in the making vs. the abrupt change in the trajectory of U.S. growth in aftermath of the financial crisis.
He blames both slowing productivity growth and accelerating IT productivity despite the contradiction.
He blames growing income inequality despite the U.S. economy and employment having grown twice as fast as Germany and France over the last two decades and over three times faster than Japan, and with higher U.S. growth largely driven by the differential success of its most productive workers.
He also blames interest rates having reached the zero bound while tacitly admitting that over two trillion dollar of monetary inflation has done little if anything to increase price inflation.
After famously disagreeing with James Tobin and Robert Barro, who argued that asset values drive investment, he now admits, it’s “only rational to recognize that low interest rates raise asset values and drive investors to take greater risks.” Ironically, he doesn’t see that an interest rate-driven increase in financial asset values does little to motive investment.
He complains that “risk aversion has risen as a consequence of the crisis and as saving – by both states and consumers – has risen.” Oddly, he describes a rise in publicly-held federal debt from 35% of GDP, prior to the crisis, to over 70% today as “state savings” rather than the opposite. And, he sees increased savings as the cause of increased risk-aversion rather than an effect. He doesn’t acknowledge that the economy has dialed back risk-taking after re-awaking to the fact that banking—i.e., the use of risk-averse savings—is highly unstable and that the trade deficit floods the U.S. economy with risk-averse savings.