Against Cutting Government Spending Now
Lawrence Summers:
I am too soon out of government to use a word like "nuts" [of the Brito-European austerity policy.]
I find the idea of expansionary fiscal contraction in the context of the world in which we now live today to be every bit as oxymoronic as it sounds. I think the consequences are likely to be very serious for the countries involved.
I think it is important to distinguish between countries that are not borrowing [and spending] because they cannot borrow, where there is a question as to how large a subsidy they should be given from the outside when they have worked themselves into a situation in which they are no longer able to borrow. That involves one set of issues.
A very different set of issues is raised by those with very little scope to expand monetary policy with the capacity to borrow who choose not to borrow based on the conclusion that improved fiscal hygiene will make everyone so much better that the economy will recover. This seems to me to be a very high-order gamble. It is not one I would be prepared to bet on.
I have always been an empiricist, so I will be happy to say that if Britain enjoys a boom over the next two years coming from increased confidence, I will be required to quite radically rethink my view of how the macroeconomy operates, and to be quite contrite about the seriousness of the misjudgments that I am making.
You can make a judgment, those of you who know me, how big a risk I would take of putting myself in such a position of contrition. And you might conclude that I am highly confident that the [Brito-European] experiment is not going to work out well.
