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Sunday, June 12, 2011

How to Avoid a Lost Decade

Larry Summers tries to stop the austerity movement from undermining the recovery:

How to avoid our own lost decade, by Larry Summers, Commentary, FT: Even with the 2008-2009 policy effort that successfully prevented financial collapse, the US is now half way to a lost economic decade. ...
That the problem in a period of high unemployment, as now, is a lack of business demand for employees not any lack of desire to work is all but self-evident... When demand is constraining an economy, there is little to be gained from increasing potential supply. ...
What, then, is to be done? This is no time for ... traditional political agendas. ... The fiscal debate must accept that the greatest threat to our creditworthiness is a sustained period of slow growth. Discussions about medium-term austerity need to be coupled with a focus on near-term growth. ... Substantial withdrawal of fiscal stimulus at the end of 2011 would be premature. Stimulus should be continued and indeed expanded by providing the payroll tax cut to employers as well as employees. ...
At the same time we should recognize that it is a false economy to defer infrastructure maintenance and replacement, and take advantage of a moment when 10 year interest rates are below 3 per cent and construction unemployment approaches 20 per cent to expand infrastructure investment.
It is far too soon for financial policy to shift towards preventing ... possible inflation, and away from assuring adequate demand. ... Policy in other dimensions should be informed by the shortage of demand... The Obama administration is doing important work in promoting export growth by modernizing export controls, promoting US products abroad, and reaching and enforcing trade agreements. Much more could be done...
We averted Depression in 2008/2009 by acting decisively. Now we can avert a lost decade by recognizing economic reality.

    Posted by on Sunday, June 12, 2011 at 07:02 PM in Economics, Fiscal Policy, Monetary Policy | Permalink  Comments (22)


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