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Here’s an excerpt from a provocative article written by Jeffrey Sachs this week:
[I]t is very frustrating to read Paul Krugman again today write about our current stagnation with so little reflection on his part that his own preferred stimulus policies can’t solve the problem. It’s of course even worse to hear this from Larry Summers, who Krugman quotes favorably today. Summers was the architect of Obama’s economic policies during the first term, and now he tells us that the administration’s policies haven’t worked.
Both Summers and Krugman subscribed to Keynesianism, the idea that larger budget deficits and short-term stimulus after 2008 would revive the economy. Neither of them reflected on how the macroeconomic policies after 2008 should respond to the causes of the crisis. If they had, they might have recommended a very different strategy. And the debt-to-GDP ratio might not have doubled in the meantime as a result of the reliance on Keynesian stimulus policies.
Keynesians like to say that there is a savings glut (an excess of saving over investment). They try to remedy it by spurring consumption. This is a mistake. There is an investment shortfall, because the financial, regulatory, and policy barriers to high-return investments have not been addressed. America urgently needs investments in modernized infrastructure, advanced science and technology, and job skills appropriate for the 21st century.
Sachs then builds on his list of preferred supply-side policies.
I took the pointer from Arnold Kling and share his caution about Sachs’ enthusiasm for top-down solutions. That said, I’m always glad to see him weigh in on the big macro issues. He seems able to separate futile policies from those that could conceivably have a net positive effect.
Another perspective that’s similar (but not identical) to Sachs’ message is this:
Keynesians rely heavily on their notion of potential output, while failing to understand that the more important concept is sustainable output. In a credit boom, they ratchet up their potential output estimates roughly alongside observed GDP growth, even as this soars well above what’s truly sustainable. The difference is approximately the malinvestment that occurs in the boom.
And then in the bust, their flawed approach leads to an insistence that demand should be forced back to previous levels, which layers on still more malinvestment.
The real challenge, though, is to create an environment that’s conducive to the growth of sustainable output.
Update: Here’s yet another interesting perspective on Summers/Krugman that someone e-mailed me, this one from outside the U.S.: “Immorality Play – Deciphering Krugmanomics.”