Thursday, April 10, 2014
NORTHAMPTON — One of the country’s most influential economic thinkers called for a dramatic increase in government spending on public infrastructure as a way to stimulate the U.S. economy, saying Monday at Smith College that a stagnant economy is far more dangerous to future generations than any debt incurred to repair airports, schools and other public buildings.
Former Treasury Secretary Lawrence H. Summers outlined his “secular stagnation” theory before several hundred students and faculty as part of the college’s annual economics department lecture.
“You should be worried a lot more about our (generation) bequeathing to you trillions of dollars of deferred maintenance bills on the nation’s infrastructure, a generation of uneducated young people who need to be employed and the loss of America’s scientific leadership, than you should be worried about a lot of debt that was incurred at an interest rate of between 1 and 3 percent,” Summers said.
The former Harvard University president, who has served as an economic adviser to President Barack Obama and was treasury secretary under President Bill Clinton, stressed that long-term economic stagnation, stretching back to the dot-com crash of the 1990s, is having a considerable negative effect on the U.S. economy.
He said America’s gross domestic product, a measure of its economic vitality, is some $1.6 trillion below what economists in 2007 thought it would be today. That amounts to lost growth of about $5,000 per American, or $20,000 per family.
“Worse yet, we’ve given up on a lot of that GDP,” Summers said. “We have revised downwards our potential GDP by almost half of that figure and come to a more pessimistic view of what our economy will ever be able to achieve as a consequence of the suffering of the last few years.”
Summers made the case that the best way to address the problem is to aggressively embark on a public works boom that will stimulate the need for goods and services and put people back to work, especially in the construction industry, which he said is still facing double-digit unemployment from the 2008 recession.
The right strategy, he said, is to try to grow the economy today by making public investments that will be paid off with the proceeds from a better-functioning economy, while at the same time reducing the need for costlier infrastructure fixes in the future. Given that the government can borrow at less than 3 percent interest, the money is much cheaper now than it will be in the future.
“If you think about it, could it possibly make sense that at a moment when we as a country can borrow money at less than 3 percent, in a currency we print ourselves ... that we have spent four years slashing our level of public investment? That is what we’ve done,” he said.
Summers was Obama’s preferred candidate to lead the Federal Reserve last year. He withdrew from consideration in September.
As far as burdening the next generation with unneeded debt, Summers said a slow-moving economy is far more dangerous for everyone, including most of the young, soon-to-be college graduates in the audience.
He later added, “I do not think it is a difficult choice. And yet it is a choice that our country has been unwilling to make because it has not been willing to face the fundamental fact that we are now caught in a situation of secular stagnation.”
In making his case, Summers asked for a show of hands from people who have been to Kennedy Airport in New York and liked what they saw. No one raised their hand.
“It’s not like we’re never going to repair Kennedy Airport,” Summers said. “We will repair it sooner or later. It’s cheaper to repair it now. If we repair it now, we won’t have to repair it later. And if we repair it now, we will accelerate economic growth.”
When asked how he would sell this idea in a political way, Summers said education will be key, along with framing the argument for people in terms of specific projects that will have meaning to their lives.
Another person asked whether it makes more sense to put these kinds of repairs in the hands of private industry, which some experts believe is better at investing than the public sector. Summers said there are many kinds of investments the private sector will never make, from constructing the Golden Gate Bridge to filling potholes on the nation’s highways.
“Respectfully, that’s the kind of thinking that made the Depression great,” he said.
Summers dismissed other possible strategies to spark economic growth, one of which involves exercising patience.
“Every year we accept economic slack is a year in which we accept a reduction in the future potential of the American economy,” Summers said.
He opened his remarks Monday with glowing comments about Smith’s new president, Kathleen McCartney, whom he promoted to lead Harvard’s School of Education a few years ago.