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Larry Summers: 'No Question' U.S.-China Relations More Important Than The Cold War

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LARRY SUMMERS
AP

No longer head of President Barack Obama's National Economic Council, economist Larry Summers has no reason to bite his lip anymore. In the most recent issue of International Economy magazine, Summers uses that freedom to explain how China's rapidly expanding economy could (or could not) alter the course of American history.

For all the U.S. economy's current deficiencies, count Summers among those skeptical of China's ability to ultimately overtake the U.S. as the world's largest economy. He's seen the current hysteria many times before, first when John F. Kennedy said he believed the USSR would be richer than the United States by 1985, and later when many joked that Japan and Germany had risen from the Cold War victorious. "[N]one of these prophecies," he notes, "proved to be correct."

If anything, Summers continues, China's growing economy could help the U.S. by scaring the country into carefully examining its failing school system, diminishing research investment, and increasingly lax borrowing policies. That would be no small feat, perhaps one reason he says there is "no question" the relationship between the U.S. and China will prove of larger historical importance than either the Cold War or "anything that happens with the Islamic world."

Domestically, Summers tags declining middle-class incomes and well-being as the primary cause of concern. The price of televisions and refrigerators may have steadily declined, Summers says, but the price of essential services like health care hasn't. That's part of the reason for the lack of consumer demand that Summers says is currently hindering a swifter economic recovery -- an entirely different issue than the credit crunch the Federal Reserve's quantitative easing was suppose to solve.

Summers uses a hypothetical restaurant to explain the problem:

It's common sense that you don't expand your restaurant or hire new waiters if your existing waiters are sitting around with no customers to serve. At this point, the problem is less with the monetary transmission mechanism [i.e. ability to lend] than with a lack of effective demand to borrow.

On quantitative easing, an unconventional Federal Reserve tactic used to further increase the money supply when interests rates are already low, Summers says he understands "the view that [quantitative easing] will be relatively ineffective, or that it will be inflationary. But I don't see how it could be both." Meaning, although unnerving, inflation might be the most useful indication we have that the experimental tactic is working.

Read the full report at International Economy magazine.

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