Saturday, April 3, 2010

Financial Times interview with Larry Summers

Martin Wolf and Chris Giles interviewed Larry Summers, director of President Barack Obama’s National Economic Council, on April 1. The following is a transcript of that interview.

LS What is certain, what I think is certain is that we’ve walked back from the brink of depression, and that there’s a great deal that’s underway that should result in increased job creation; whether it’s the measures contained in the recent Jobs Bill, to extend unemployment insurance, reduce . . . eliminate social security taxes for new hires, enhance certain kinds of infrastructure spending, support small business, and there’s a range of other things that we’ve got to do: tax benefits to support investment, further support for state and local government, further investments in energy efficiency, particularly giving people an opportunity to retrofit their homes.

MW You talked about growing the economy faster or harder. The forecasts I’m seeing suggest about 3% growth this year as being a central estimate. I can’t remember what the official one is. How far do you think there are still policy instruments available to you or of course to the monetary authorities which could affect your ability, as it were, to grow the economy faster, or is basically the policy toolkit used up?

LS I think there’s a great deal in past policy that will continue to have an impact. One of the things that people most consistently forget is that two generations of studies show that the lag between monetary policy and impact is six to 18 months. So the financial policies that will be affecting the economy over the next nine months are not the contemporaneous ones, but the ones from some time ago. Only about half the resources from the Recovery Act have yet been disbursed. So there is substantial fiscal policy in train.

We are seeing some of the benefits of the financial policies that forced so much capital into major financial institutions in increased levels of lending that are showing up in statistics. We took steps last week to enhance the programmes in support of the housing sector, by enhancing the ability to refinance underwater homes on more favourable terms which should make it significantly easier . . . should reduce pressures in the housing market and should also make it easier for home owners to engage in improvements in their homes of various kinds, all which contribute to aggregate demand.

The president has announced and will be carrying through a set of initiatives directed at promoting exports, by taking steps like reducing export controls, by taking steps like more aggressive promotion of US products in foreign competition. We’re working to pass through the Congress legislation that would enhance the flow of credit to small businesses and provide a variety of other tax support for small businesses.

But I think that’s the first part of the answer. The second part of the answer is to say the cheapest stimulus of all is increased confidence, and by laying a new foundation, ultimately the Business Roundtable itself, the Congressional Budget Office, almost everyone who’s looked at it in a comprehensive way, rather than looking at individual provisions, has concluded that our Health Bill will reduce premium costs for major employers. The increased transparency and regulation of financial institutions will reduce the uncertainty that comes from the ever present possibility of financial crisis. The steps that the president’s taken to provide support to nuclear power, to free up fossil fuel, free up offshore areas for fossil fuels, to drive both the installation of renewable energy systems and production related to renewable energy systems, will all operate to increase investment in that sector.

So I think the sense that the country’s long term problems - healthcare, energy, education are being addressed, long rung fiscal deficits, all of that - should increase a generalised sense of confidence and that too will be a source of stimulus to the economy.

CG Do you see the economy, the growth being self sustaining now? Or are we on a process whereby the time the fiscal money runs out, are you confident that we’re then in a self sustaining growth?

LS I think the economy appears to be moving towards escape, quite clearly moving towards escape velocity. You hear a lot less talk of W-shaped recoveries and double-dips than you did six months ago. And there are obviously uncertainties, there obviously can be new shocks, but I think one has to see the performance of the economy against the backdrop of a major economic downturn associated not with the sharp tightening of monetary policy but with the collapse in asset prices.

And if you use as a standard for judging the US economy the aftermath of financial crises of the kind summarised in the Rogoff and Reinhart book, what I think you have to be impressed by is that the timetable to major action was much shorter than is historically normal and that the process of recovery seems to be more sustained. It seems to have started earlier and more vigorously than was common in that category of problems. But, at the same time, one can’t lose sight of the fact that post-bubble deleveraging crises of the kind that the president inherited are a serious economic affliction that doesn’t get cured overnight.
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