Liveblogging World War II: February 11, 1943
Hoisted from the Archives: Classical Roots of "Winter's Bone"?

Larry Summers: U.S. Must Do More than Focus on Deficit

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I would say not "do more" but "do different": the U.S. has been focusing on the deficit since the end of 2009, and all that has gotten us has been a jobless recovery. Were we to focus on employment and growth, we would be highly likely to make more progress on reducing the future burden of the debt than when we focus on the deficit--that is, indeed, the message of the arithmetic underlying DeLong and Summers (2012).

Arithmetic, by the way, that I do not believe has been challenged by anybody--save for Marty Feldstein when he raised the possibility that maybe a deeper recession now does not retard but speeds the growth of potential output.

Larry's point about housing finance is, I think, key: Fannie Mae and Freddie Mac have made a lot of money over the years because of their government guarantee; in an environment where private-sector risk-tolerance is still abnormally low, they need to pay the government back by taking on more risk and so boosting the economy. In the mid-2000s we had many too many privately-held subprime housing loans held by undercapitalized private banks. But right now what we really need are a lot more subprime housing loans held or guaranteed by the government and the GSEs.

Larry Summers:

US must do more than focus on deficit:S There should be little disagreement across the political spectrum that growth and job creation remain America’s most serious national challenge…. The US economy grew at a rate of 1.5 per cent in 2012. Last week, the independent Congressional Budget Office projected that growth will be only 1.4 per cent during 2013 – and that unemployment will rise…. [T]he CBO… predicts that unemployment will remain above 7 per cent until 2016…. A weak economy and limited job creation make growth in middle class incomes all but impossible, pressure budgets by restricting tax revenues, and threaten essential private and public investments in education and innovation. Worse, it undermines the American example at a dangerous time in the world.

We can do better…. But this will require moving the national economic debate beyond its near total preoccupation with federal budget restraint. Yes, medium-term fiscal restraint is necessary…. But it is not sufficient. Unlike the 1990s, when reduced deficits stimulated investment by bringing down capital costs, fiscal restraint cannot be relied on to provide stimulus now when long-term US Treasuries yield below 2 per cent. A broader, growth-centred agenda is needed….

First, as the president has recognised, budget cuts implicit in the fiscal “sequester” scheduled to begin in March should be spread over time…. Second, the president and Congress should fix a firm deadline of the end of this year to address the international aspects of corporate tax reform. We are now in the worst of all worlds with US companies having nearly $2tn in cash sitting abroad, because of tax burdens on bringing it home and the perception that relief may be on the way….

Third, no American should be satisfied with the nation’s system of housing finance. After a period when cheap mortgages were too available, the pendulum has swung too far and lack of finance is holding the economy back. The clearest evidence of this is the growing number of lower- and middle-income families paying rents to the private equity firms that own their homes at rates such as 8 per cent of value – far above what a mortgage would cost. Fannie Mae and Freddie Mac, the government-sponsored housing enterprises, have historically provided support to the mortgage market in difficult times. It is high time they were forced to step up to support would-be lenders.

Fourth, the transformation of the North American energy sector must be accelerated. This will have economic and environmental benefits. Those weighing the decision about whether to approve the Keystone pipeline, which would run between the tar sands of western Canada and Nebraska, must recognise that any Canadian oil not flowing to the US will probably flow to Asia, where it will be burnt with fewer environmental protections. Natural gas exploitation, too, can bring huge environmental benefits. Replacing coal with natural gas has much more scope to cut greenhouse gas emissions than more fashionable efforts to promote renewables….

More items… innovations in regulation and finance with respect to infrastructure investment…. Growth and job creation are, after all, the ultimate ends of economic policy. They, at least as much as fiscal issues, should become the focus of our national economic conversation.