To Fix Ailing Economy, Increase Demand, Says Summers

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.”