As far as I can tell here’s Lawrence Summers’s strategy for spurring economic growth: the beatings will continue until morale improves. After examining and dismissing two possible strategies, “emphasize what is seen as the economy’s deep supply-side fundamentals: the skills of the workforce, companies’ capacity for innovation, structural tax reform and ensuring the sustainability of entitlement programs” and “lowering relevant interest rates and capital costs as much as possible and relying on regulatory policies to ensure financial stability”, his proposal is to increase demand, both by increasing government spending and increasing private spending. Ignoring the circular nature of his proposals (the way to encourage spending is to spend more), I’m a bit concerned about his approaches.
“Public investment” as it’s been construed recently does precious little to produce sustainable economic growth. We don’t need more infrastructure spending (defined as building roads and bridges). We’re already overbuilt. Although the actual construction spending might do a bit of largely localized good, ensuring that we have 154 bridges across the Mississippi rather than 153 or that all cities with more than 50,000 population are within ten miles of an Interstate has practically no residual benefit. Neither does spending more on healthcare or education. More healthcare and education might but the pattern of the last thirty years is that greater inputs do not yield greater outputs. If anything, it’s the reverse. We spend a multiple today in real terms of what we did twenty years ago on education without material benefit except in a Red Queen sort of way.
I’m open to the the idea of public spending as a means of producing sustainable growth but I’d like to see some specific proposals. This is not the 1930s. Now we have a large component of the economy that’s mobilized to suck up every dollar the federal government is willing to throw.
Similarly with Dr. Summers’s approach to encouraging private investment:
Much could be done in the energy sector to unleash private investment toward fossil fuels and renewables. Regulation that requires more rapid replacement of coal-fired power plants would increase investment and push growth as well as help the environment.
Does this strike anyone else as a nearly perfect example of the “Parable of the Broken Window”?
Here’s an alternative: the president could approve the building of the Keystone pipeline. It appears that’s something that people already want to do rather than breaking a window so the glass can be replaced.
However, I’d like to hear other suggestions.
I just seems to me that if we continue to do what we’ve been doing, which is largely what Dr. Summers advocates, we’ll continue to get the results we’ve been getting.