If Not Now, When?

Following the path that Japan forged we are poised on the brink of ending a full decade of economic growth inadequate to bring the people who lost their jobs in the late recession back to work. Defenders of Keynesian responses continue to mourn the inadequacy of the federal government’s response in 2009. Other voices point to the recession as an example of a “balance sheet recession”, brought on by excessive debt.

This morning Lawrence Summers, by nearly every account the principle architect of the inadequate response who, to the best of my ability to determine, has advocated exclusively Keynesian responses to the recession as though it were an ordinary cyclic recession, takes to the Washington Post op-ed page to urge the members of the Federal Reserve Board to leave interest rates just where they are:

There can be no question that tightening policy will adversely affect levels of employment as higher interest rates make holding onto cash more attractive relative to investing. Higher interest rates also will increase the value of the dollar, making U.S. producers less competitive and pressuring the economies of our trading partners. This is especially troubling at a time of rising inequality. Studies of periods of tight labor markets such as the 1960s and the late 1990s make clear that the best social program for disadvantaged workers is an economy where employers are struggling to fill vacancies.

There may well have been a financial-stability case for raising rates 6 months or 9 months ago, as low interest rates were encouraging investors to take on risk and businesses to borrow money and engage in financial engineering. Even at that time, I believed that the economic costs of a rate increase exceeded the financial-stability benefits, but there were grounds for concern about the medium-term impact of low rates on financial stability.

Is there some point at which Dr. Summers will encourage structural changes or deleveraging policies or, like a good courtier, will he persist in encouraging the policies favored by his patrons? Keynes’s advocacy for monetary sovereigns to use short term deficit spending as a means for making up for a shortfall in aggregate demand was explicitly a short term solution. If the shortfall were allowed to persist, it would result in declines in aggregate product, calling for structural changes.

Meanwhile, total indebtedness grows, labor force utilization languishes, and pension funds seek ever-greater risks to realize the levels of return needed for them to remain solvent. The clock is ticking on the business cycle, which still hasn’t been repealed, and the Fed has very little in the way of tools to counter it.

His patrons will never call for structural change. Will he?

2 comments… add one
  • Andy Link

    It’s called living in a bubble – it’s an inability to see or consider alternatives. It’s an affliction that frequently affects “experts” particularly one with skin in the game.

    BTW Dave, did you hear about China allowing it’s pension funds t invest in the Chinese Stock Market? What could go wrong!

  • ... Link

    His patrons will never call for structural change. Will he?

    Summers already fucked up once in his career by questioning the accepted narrative. I doubt he’ll make that mistake again any time soon.

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