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Forget The Debt, Concentrate on Growth


Larry Summers wrote a smart column in the FT this past weekend, arguing that the debt ceiling deadlock in Washington and its attendant wrangling over minutiae like medical device taxes may very well go down in history as a minor event. The debt itself, he argues, shouldn’t be keeping us up at night: it’s a second-order problem. The real challenge is ensuring robust growth:

Data from the CBO imply that an increase of just 0.2 per cent in annual growth would entirely eliminate the projected long-term budget gap. Increasing growth, in addition to solving debt problems, would also raise household incomes, increase US economic strength relative to other nations, help state and local governments meet their obligations and prompt investment in research and development.

Summers is quite right. The growth problem is much more important than the deficit problem. Raising the overall level of economic growth would substantially improve the budget picture long term.

But the reality, which Summers probably understands much more clearly than does much of his party (and this is partly why liberal Democrats sabotaged his bid to become Fed chairman) is that boosting growth involves an attack on some of the regulatory practices and social policies dear to the hearts of many Democrats. Another way of saying this is that changing technology is making it possible for the US long-term to combine generous social programs with low taxes and low debt, but that in order to gather in this bounty we need significant social reforms and many existing programs need to be changed.

Promoting growth is much better politics and policy than peddling austerity. America needs a growth party much more than it needs an austerity party—and it needs a status quo, stand pat party even less.

[Photo courtesy Getty Images.]

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  • Andrew Allison

    Larry Summers is completely wrong! First, as QE1-n have most recently demonstrated, the problem is misallocation of resources engendered by government policies. Second, he appears oblivious to the fact that our debt-to-GDP ratio is the same as that of Spain and of the implications!

    • rheddles

      Summers also took a very short term view of the problem. Look out to 2030 and those ratios really deteriorate, no matter what the growth rate because of entitlements. I was very disappointed by the article. It was a political article, not economic.

      • f1b0nacc1

        Ah, but Summers will not be around by then, so he won’t mind…

        • Andrew Allison

          You raise an interesting point: is Summers blinded by ideology, mendacious or just plain stupid? Based on the Harvard debacle, I’m inclined to think the latter!

          • rheddles

            But you’d be wrong. Larry Summers is a very bright guy. But he has been sent to re-education camp twice now. He’s learning how to say what his masters want to hear. It’s actually a tribute to him that he could express any cogent thought after tours at Harvard and the USG.

          • f1b0nacc1

            I met Summers years ago, and the impression that I came away with was that he is almost as smart as he thinks he is. The problem with that is that he very obviously is obsessed with proving it to anyone who will sit still long enough to listen to him, which is a very tedious affair indeed.

          • Kavanna

            Summers is blinded by his own arrogance. He’s a smart man and understands economics. But his inflated ego and political loyalties keep him from facing unpleasant truths.

          • Andrew Allison

            One would think, given his recent history, that his arrogance would be at an all-time-low, but it appears not. If, as you suggests, he understands Economics, then the only possible evaluation of his position is mendacity.

      • Andrew Allison

        I was disappointed that VM thought it was a smart column!

  • Anthony

    Larry Summers’ argument is focus is wrong (U.S. has its eye off the ball). His short essay gives thought to alternatives:

    • Andrew Allison

      The article posits the same (obvious) fact that the answer is growth. Unhappily, like Summers, it argues that the way to achieve this is more government spending, i.e., debt. The Greeks have a word for that!
      The evidence suggests that government is stifling rather than encouraging growth, the shift to part-time employment engendered by the ACA being but the latest example. Don’t get me wrong, I’m not in favor of unfettered capitalism, but the pendulum does appear to have swung too far the other way (other than in the case of Wall Street, which appears immune to any sort of restraint).

  • Jacksonian_Libertarian

    “Promoting growth is much better politics and policy than peddling austerity. America needs a growth party much more than it needs an austerity party—and it needs a status quo, stand pat party even less.”

    I don’t understand what that means. Who’s growth, who’s austerity, and who’s status quo?
    If the burden of government was significantly lightened, the economy would explode with growth.
    I refer you to the Rahn Curve:

    a nation’s economic growth is maximized when the burden/spending of all Government (Federal, State, and Local) is between 15%-25% of GDP, the American average at the moment is about 45% and that is before Obamacare gets implemented.

  • Pete

    1. Debt impairs growth.

    2. The debt and unfunded liabilities of the government are so massive, the country can never grow out of the it.

    3. And Summers does not even address the corrupt political class we have that is out for itself always and is disconnected from America,

    4. The only way out of government debt is not growth; it’s default, especially on promises made to the people (Medicare and SS.).

    • Andrew Allison

      Pete, I am in general agreement, but there are two ways out of government debt: default and inflation. I fear that Helicopter Ben & Co., have chosen the latter.

      Might I also point out that default means a borrower failing to fulfill debt obligations.
      It’s perfectly clear that government at all levels have made promises that can’t possible be kept, but let’s not confuse the inevitable result with default which, whether individual or national, has long-term effects on credit worthiness rather than credibility.

      • Pete

        Agreed – inflation will play a huge (and deliberate) role in discharging the government unplayable debt. (It already is, in fact, regardless of what the bogus government inflation stats say.)

        But there will also be selective defaults, especially in areas like SS and Medicare where promised benefits will be trimmed to one degree or another.

        Also, look for the government to get more aggressive in stealing more of the people’s money — from tax increase to bail-ins to traffic cameras on the local level.

      • f1b0nacc1

        You left out a third alternative to deal with debt….growth.
        With that said, the problem to me is not so much debt (though that too is a long-term issue), but over-regulation and intrusion by the state. The market distortions of the ACA are an excellent example of this, though they are hardly the only ones. The current administration has used the financial crisis as a basis for implementing a host of worthless regulatory initiatives, and these are devastating the economy, and exacerbating the debt issue.

  • USNK2

    Growth in jobs IS the answer.
    Texas has a good model to follow, including a part-time legislature who does NOT use the Harry Reid measure of productivity by how many new laws and regulations they can pass.
    Larry Summers does not have the temperament (or the record) to inspire confidence in anything he says or writes.

  • Corlyss

    “in order to gather in this bounty we need significant social reforms and many existing programs need to be changed.”
    Right. Well, we can kiss that prospect goodbye.

  • Anthony

    “Summers is quite right….” WRM, browsing observation: whether you favor former U.S. Treasury Secretary Lawrence Summers’ politics and/or economic observation/preference, the article/essay quoted in Quick Take has been circulated today in Reuters, Fiscal Times, and Financial Times (all under different titles). Obviously, some think his comments on economic and financial issues deserve readable note among…

  • Bruno_Behrend

    Summers is spewing claptrap.

    At some level, the size and inertia of international debt must be cut – steeply.

    A spurt of growth above four percent will not generate sustainable debt levels. Such growth will only encourage governments to borrow more.

    Add to that the likelihood that four percent growth rates are possibly a thing of the past for highly developed economies, at least as long as they have to muddle through the demographic bubble of taking care of the aged.

    Summers Miley wants to avoid the necessary “big hair cut” needless government employment. We need to cut whole swaths of employment out of K-12 and higher education.

    We also need extreme cuts in existing and future pension benefits. Indeed, one could argue that we wIll never see four percent growth until we make such decisions.

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