A recent article by Larry Summers, entitled The global economy is in serious danger, recently caught my eye. For those who don’t know, Lawrence (Larry) Summers is a professor at Harvard and served as the Secretary of the Treasury from 1999 to 2001. No doubt the inflow of cash into the treasury during his tenure, a fact many economists credit to the ebullient spirit associated with ‘the new digital economy’ and the automatic stabilizers in the economy, did much to give him a reputation as an economic seer. But generally, I tend to take what he has to say with a huge shaker of salt mostly based on such idiotic sentiments as
This current ‘chicken little’ prophesy of doom is really no exception. Although, to ‘be fair’, he does make some valid points in some areas but the bulk of his analysis is repackaged Keynesianism, which, oddly enough, may actually work in the particular situation the global economy is in.
In a nutshell, Summers warning center on secular stagnation where slow growth in the developed world hurts the emerging markets which, in turn, hurts the industrial countries.
To support this claim, Summers cites the IMF’s revision of growth forecasts for the US, Europe, and China downward. On the surface, this seems to be a slam dunk of a pronouncement but looking under the veneer one should ask if the IMF foresaw the global financial crisis of 2008. If they didn’t, which I suspect they did not, why start believing them now?
Summers also cites a curious statistic to make us feel all scared inside about the slowdown in growth in China. He points out that China poured more concrete in the time span from 2010 to 2013 that the United States did in the entire twentieth century. This statistic, which is explained in more detail here, seems genuine but who cares. Again, without any context whereby the statistic is put on level footing it is hard to know what to make of it. During the bulk of the twentieth century concrete was not the chosen material for building. Only in the last third of that century did steel reinforced concrete really rise to a common building material, with granite and brick being much preferred prior to that time. A more meaningful comparison would have been to show how much the US used in the span between 2010 and 2013 and even then the comparison would be misleading as the US isn’t trying to catch up to the developing world nor is it trying to lift over a billion souls up to a higher standard of living almost overnight.
In another curious meandering of his thought made manifest in print, Summers writes
Okay, which one is it Larry? Should we ignore the market because it is inefficient and often wrong about economic fundamentals or should we listen to the adverse signals that originate from it?
Sigh…
Despite all this intellectual-sounding fluff, the odd thing is that I think Summers has a point. Currently the amount of money in the economy is high and inflation is low. More dollars should be chasing the same amount of goods leading to growth and, perhaps, inflation. But it isn’t happening.
Summers doesn’t seem to venture a guess as to why but he comes close to a hint. He mentions that China is suffering from a hangover due to unproductive investment. What a surprise – a Keynesian actually suggesting that economic activity is not enough – that an economy needs to invest wisely.
And so finally, we arrive at the only useful nugget to be found in Summers’ analysis. Governments, businesses, and households all have to be prudent and wise in their investments. In the late 90s through to 2008, they were generally overly enthusiastic and made stupid investments and took on unsupportable debt. Post financial crisis, governments have layered even more burdensome regulation on the economy; regulations that they continually tinker with to show how responsible they are. Businesses are sitting on cash timidly afraid to take risk. Households have hunkered down and are waiting to see what their so-called leaders will do.
Someone has got to get the ball rolling again and perhaps Summers is right in saying that it is government that needs to do this. But if this is the case, then businesses and household need to be vigilant in making sure that increased government spending is done wisely. We don’t need anymore hangovers.