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Sunday, September 16, 2012

Summers: Britain Risks a Lost Decade

Larry Summers says Britain needs to change course, or risk prolonged stagnation:

Britain risks a lost decade unless it changes course, by Lawrence Summers, Commentary, Financial Times: It ... is fair to ask economists a fundamental question: what could happen that would cause you to revise your views of how the economy operates and acknowledge that the model you had been using was flawed? As a vigorous advocate of fiscal expansion as an appropriate response to a major economic slump in an economy with zero or near-zero interest rates, I have for the past several years suggested that if the British economy – with its major attempts at fiscal consolidation – were to enjoy a rapid recovery, it would force me to substantially revise my views about fiscal policy and the macroeconomy.
Unfortunately for the British economy, nothing in the past several years compels me revise my views. ...
Britain must change the pace of fiscal consolidation to stand a chance of avoiding a lost decade. Rather than starving public investment, now is the time to add to confidence by making plans for structural reforms to contain the growth of public consumption spending over time. It is also time to take overdue measures to promote exports and, after years of appropriately low investment, to restart housing investment. But when demand is needed for growth and the private sector is hanging back, the first priority must be for the public sector to stop exacerbating the contraction.

If we follow Britain, as many in the "Mitt for President" camp would have us do, we face the same risk.

    Posted by on Sunday, September 16, 2012 at 12:55 PM in Budget Deficit, Economics, Fiscal Policy | Permalink  Comments (26)


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