Larry Summers: The American Economy is Sick
NEW YORK -- Safely removed from the Obama White House, where he was a prime architect of economic policy, Larry Summers now tells us what most regular people have known for too long: The economy is ailing and in grave need of help.
In a sobering and clarifying opinion piece in Sunday's Financial Times, Summers laments that "the US is now halfway to a lost economic decade," describing a contemporary scene in which "new college graduates are moving back in with their parents."
Most strikingly, Summers takes direct aim at the assumption that amounts to the default stance inside the White House: If we demonstrate our resolve at attacking long-term budget deficits by cutting spending, the market will gain "confidence" -- a mystical term among practicing economists. Eventually, everything will get better.
Nonsense, Summers effectively scoffs. "A sick economy constrained by demand works very differently from a normal one," he writes, before calling for a fresh stimulus while pointedly rejecting deficit-cutting as the fix. "The fiscal debate must accept that the greatest threat to our creditworthiness is a sustained period of slow growth."
Translation: For those offering up scary warnings that a failure to slash spending courts the prospect of Uncle Sam running out of money and defaulting on his debts, the quickest way there is to slash spending and ensure that commerce grinds to a halt.
Never mind that Summers is now talking a very different line than the one he dispensed when he still worked at the White House. (In another Financial Times piece last July, he offered up deficit reduction as a curative therapy, a dose of discipline that would instill "increased confidence and reduced capital costs that encourage investment, even before the deficit is reduced.") The point is that Summers has joined the crisis camp, adding his booming voice to those intoning that we must get serious about investing in economic growth -- a process that requires setting aside the tedious and small-minded budget-cutting debate consuming all the oxygen in Washington. Either that, or we run the risk of condemning a whole generation to years of chronically lean economic opportunities.
Summers' warning underscores a trend that should make anyone skeptical of what is happening in Washington. He is the latest in a parade of economists to depart the White House, and then express deep fears about where the country is headed.
Jared Bernstein spent the first two-plus years of the administration serving as economic policy adviser to Vice President Biden, before last month joining the Center on Budget and Policy Priorities as a senior fellow. In a blog post last week, Bernstein vented dismay at the sorry state of the policy debate, declaring, "It's hard not to feel like we're stuck in a bad place and there's nothing we can do about it." There is plenty we can do, Bernstein argued, beginning with getting past the notion that we can scrimp our way back to prosperity. We have to invest in measures that will stimulate job growth, such as providing aid for reeling states and boosting infrastructure spending.
Christina Romer, who chaired the White House Council of Economic Advisers, stepped down last fall to return to her academic career at the University of California, Berkeley. "The Administration and Congress should have done more in the fall of 2009 and early 2010 to aid the recovery," she said in a recent speech.
You can already imagine the cadences of Austan Goolsbee, still chairman of the Council of Economic Advisers yet already on his way back to the University of Chicago, presumably soon to be criticizing the tepid White House response as another year went by with the promised recovery still elusive in most American homes. (For now, Goolsbee is sticking to the story that things are getting better and will become swell if we wait patiently.)
But the candor of the former White House insiders highlights something of more than symbolic import: a growing disconnect between the economy as seen by people in Washington and the economy experienced by most Americans, which is failing to satisfy basic needs while stoking anger, dismay and frustration.
Last week, during a conference of personal finance editors and writers at the White House, I listened to Gene Sperling, director of the National Economic Council, speak for half an hour about the need for a comprehensive solution to the federal budget deficit. He took us deep into the weeds of the debate with the Republicans over how to go about it, drawing sharp (and familiar) differences between the two sides. In Sperling's account, the Republicans want to balance the budget by starving old people and being mean to adorable children, while Democrats want an orderly and responsible budget-cutting process, one sensitive to the reality that the economy is still struggling, reinforcing the need for relief programs.
It seems obvious that the Obama administration's approach to attacking the deficit is indeed more enlightened than that of the Republicans, who have sought to effectively dismantle Medicare while punishing jobless people by revoking their unemployment insurance. Yet the session with Sperling cemented the fact that, despite growing evidence the economy will not heal on its own, this administration is failing to marshal an adequate response, accepting the conventional wisdom that all potential initiatives are political non-starters.
The White House has affirmed the logic of the moment, that the only thing worth discussing is how best to confront the deficit. When I asked Sperling about this, he said nothing to disabuse me of this view.
Deficit reduction "is a means and component of a strategy to have a growing economy that fits our values of having a strong middle class," Sperling said. "Bringing confidence to the public and investors that Washington, even with its divisions, is capable of coming together and making progress in terms of living within our means."
But this is precisely the wrong place for bipartisan unity, and the wrong sort of confidence to foster. Indeed, one can reasonably argue that it is precisely because markets are confident in Washington's seriousness about cutting budgets that employers are so reluctant to add to their payrolls and resume hiring. If austerity is the guiding light, who can have confidence that working people will have money to spend anytime soon? If Democrats and Republicans alike are insistent on rolling back aid for strapped local governments, accepting layoffs of teachers and police officers as an unavoidable consequence, then who can feel confident that the economy will gain functionality any time soon?
In a poll of economists published in Monday's Wall Street Journal respondents labled weak hiring -- not the deficit -- as the biggest threat to the so-called economic recovery underway.
But the White House seems tuned to a different channel. This pursuit of market confidence, with the social safety net served up as sacrificial offering, is eroding the broader confidence needed by business owners, investors and working people: the sense that those in charge of the government are intent on tackling what is increasingly looking like a full-blown economic crisis.