A five point economic strategy from Larry Summers

Before getting to his 5 point economic plan, Summers argued that despite its central importance as a precautionary measure, initiating a long term debt reduction deal today, unlike in 1993, cannot be supposed to constitute a growth strategy going forward. “It’s a defensive rather than offensive measure.”

In 1993, fiscal consolidation led to lower interest rates, capital costs, and barriers to investment and thereby spurred economic growth. Today, as he put it, “you can’t fall very far out of the basement.” In other words, since rates are so low, we won’t get the same impact via lowering rates that we did then since they are already near zero.

He also argued that those who say we should focus only on long run growth and dismiss the benefits of near term fiscal support are misguided because short run support builds a foundation for long run growth. Preventing cyclical challenges from hardening into structural ones establishes this foundation as cyclical challenges result in lower R & D investment, lower labor force participation, lower human capital accumulation and skill formation, and lower lifetime earnings profiles for those who graduate in a recession. [see more here from Delong & Summers]

So what do we do? His economic strategy calls for the following 5 items:

  1. Increase public investment
    If not now, when? “Interest rates in a currency that we print are 2.8% for 30 years and construction unemployment hovers around 15%.” 
  2. Support employers in hiring workers
    Don’t let the payroll tax credit expire and provide hiring credits for firms that expand their employment rolls.
  3. Increase energy investment on multiple fronts
    As production becomes more automated, energy costs have become a bigger portion of total costs for American firms. Investing in this sector can not only help diminish dependence on foreign oil, but also enhance the competitiveness of American firms. We should error on the side of doing too much rather than too little on energy
  4. Increase exports (especially of tourism and higher education)
    Tourism can be an important export sector that not only has growth potential but also supports employment opportunities for less skilled individuals. We have the best higher education system in the world. We need to build on that and expand it to more students.
  5. Tax Reform

About ozidar

I'm an Assistant Professor of Economics at the University of Chicago Booth School of Business and a Faculty Research Fellow at National Bureau of Economic Research. You can follow me on twitter @omzidar. http://faculty.chicagobooth.edu/owen.zidar/index.html
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One Response to A five point economic strategy from Larry Summers

  1. Pingback: 5 Top Posts from the Archives: Tax Cuts for Job Creators, Inequality, & Capital Income Taxation | owenzidar

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