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Sunday, January 05, 2014

Summers: Strategies for Sustainable Growth

Larry Summers:

Strategies for sustainable growth, by Lawrence Summers, Commentary, Washington Post: Last month I argued that the U.S. and global economies may be in a period of secular stagnation in which sluggish growth and output, and employment levels well below potential, might coincide for some time to come with problematically low real interest rates. ...
More troubling,... there are signs of eroding credit standards and inflated asset values. If the United States were to enjoy several years of healthy growth under anything like current credit conditions, there is every reason to expect a return to the kind of problems of bubbles and excess lending seen in 2005 to 2007...
The challenge of secular stagnation, then, is not just to achieve reasonable growth but to do so in a financially sustainable way. There are, essentially, three approaches. The first would emphasize ... deep supply-side fundamentals: the skills of the workforce, companies’ capacity for innovation, structural tax reform and ensuring the sustainability of entitlement programs. ...
The second strategy, which has dominated U.S. policy in recent years, is lowering relevant interest rates and capital costs as much as possible and relying on regulatory policies to ensure financial stability. ...

He explains why the first two strategies are problematic, especially the second, and moves on to:

The third approach — and the one that holds the most promise — is a commitment to raising the level of demand...
Secular stagnation is not inevitable. With the right policy choices, the United States can have both reasonable growth and financial stability. But without a clear diagnosis of our problem and a commitment to structural increases in demand, we will be condemned to oscillating between inadequate growth and unsustainable finance. We can do better.

    Posted by on Sunday, January 5, 2014 at 04:54 PM in Economics | Permalink  Comments (47)

          


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