Former Treasury Secretary and former Director of the White House United States National Economic Council Lawrence Summers gives his prescription for breaking out of the Sisyphean cycle the U. S. economy appears have entered:
So, what is to be done? Rather than focusing on lowering already epically low rates, governments that enjoy such low borrowing costs can improve their creditworthiness by borrowing more, not less, and investing in improving their future fiscal position even assuming no positive demand stimulus effects of a kind likely to materialize with negative real rates. They should accelerate any necessary maintenance project-issuing debt leaves the state richer not poorer, assuming that maintenance costs rise at or above the general inflation rate.
As my colleague Martin Feldstein has pointed out, this is a principle that applies to accelerating replacement cycles for military supplies. Similarly, government decisions to issue debt, and then buy space that is currently being leased, will improve the government’s financial position as long as the interest rate on debt is less than the ratio of rents to building values – a condition almost certain to be met in a world of sub-2% government borrowing rates.
I think that one aspect of his prescription, i.e. preferring spending that does more over spending that does less, is commonsensical. Commonsense has been in terribly short supply in Washington for some time. However, I’m not as sure about one of the examples he gives: accelerating replacement cycles for military supplies. This would seem to me to be an example of time-shifting and assumes that the economy at the time from which the spending is being shifted is stronger than the economy is now. What if the economy in a year or two years is weaker than it is now?
Another reason to be chary of his prescription is that levels of public debt approaching 100% of GDP have been shown to be associated with slower growth in GDP. I would think that our problem is that GDP is growing too slowly rather than too quickly.
Rather than focusing on lowering already epically low rates
When ever I hear a pol (and make no mistake Summers is a pol) talk about changing tax rates I know I’m in for a distraction. Reform the whole damned tax structure, and stop with the bullshit tax rate arguments.
As I’ve written previously, we’re overdue for a major overhaul of the tax code. We’ve typically had one roughly every twenty years. It’s like a ship. Every so often you’ve got to pull it up into drydock and scrape off the barnacles.
We’re now going on 30 years without a major overhaul and I think the whole country is showing the strain. I think that part of the blame for the long period between major tax code reforms goes to the increasing polarization of the parties and that, in turn, can be attributed to gerrymandering, the Congressional committee system, and the way we fund political campaigns.
I just saw that Greece has apparently banned all polling until after the forthcoming election. I immediately wondered what a ban on polling would do to our politics?
I would rather see a ban on paid political advertising on television. I recognize that would probably require a constitutional amendment.
There’s quite a number of countries that ban political advertising on television outright (Switzerland, Sweden, Norway) and an even larger number where paid political advertising is banned, e.g. the UK, France.
Not sure how one could ban political advertising given the present Constitution. Personally, I don’t think political advertising is that much of a problem though.
@Dave Schuler
There is no evidence that debt/GDP ratios of a certain percentage slow economic growth.
“Another reason to be chary of his prescription is that levels of public debt approaching 100% of GDP have been shown to be associated with slower growth in GDP.”
Pulbic debt levels approaching 100% of GDP have not been shown to result in slower economic growth.