Lawrence Summers delivered what was essentially his swan song from the Obama Administration, where he serves as director of the White House’s National Economic Council through the end of this year before returning to Harvard University.
Speaking at the Economic Policy Institute (EPI) in Washington on Dec. 13, a day before the Federal Reserve Open Market Committee (FOMC) meeting and after the Senate procedural vote on the Obama-GOP tax bill, the former president of Harvard and Treasury Secretary under President Bill Clinton defended the current Administration’s economic policies.
Summers said that while the American economy “may be out of the intensive care unit, the patient now faces the long road of not simply recovering from the current affliction, but needing to address its chronic ailments.”
“The slow process of recovery leads some to conclude that we have now entered a weakened state of affairs,” but said that he and “President Obama reject this view.”
Asking next, “What’s holding our economy back?” Summers answered his own question by arguing that “the constraint on our economy now and in the years ahead will be the lack of demand” on the part of both businesses and consumers, the restoration of which he called an “unquestionably necessary component of a full recovery.”
However, he said that “the approaches we have become used to over the last 50 years to supporting demand in a market economy are not open to us today.” For example, he noted that “base short-term interest rates cannot be reduced to below their current level of zero.”
In the face of excess industrial capacity, stubbornly high unemployment and growing debt, he continued, “it is not clear that even if it were possible, that falling interest rates would be terribly potent in convincing businesses and consumers to spend more. We need less traditional approaches,” which he said the Obama Administration was employing, to drive demand.
Responding to a question from a journalist on the merits of the deficit reduction proposals that have been floated by several blue-ribbon commissions, including one appointed by Obama himself, Summers said “the commissions also called for short-run measures to increase demand," and said that having stabilized the economy, “the right time to cut wasteful spending is right now.”
He concluded by reiterating that he expects that the economy “will be demand-constrained for several years to come,” and suggested that “fiscal policy and the structural deficit is a very important determinant of demand.”