A Full Economic Recovery From the Recession Is Nowhere in Sight
LARRY SUMMERS MAY BE OUT of the White House, but he is still a remarkable bellwether of establishment economic thinking. As the Treasury secretary under President Clinton, he was a stalwart of fiscal discipline and financial deregulation; as the director of President Obama’s National Economic Council through 2010, he was a brake on big stimulus proposals. Now, in these days of worldwide fiscal austerity, he has reinvented himself, in lectures, on television, and in the press, as a pro-growth moderate. In an essay published in the Financial Times last March, for example, he warned against the dangers of “premature” efforts to rein in the U.S. deficit with harsh spending cuts and tax increases:
Even if the economy creates 300,000 jobs a month and grows at 4 percent, it would take several years to restore normal conditions. So a lurch back this year towards the kind of policies that are appropriate in normal times would be quite premature.” [Emphasis added.]
Of course, it’s true—with unemployment still at nearly 8 percent, a “lurch” toward austerity now would be disastrous. And for opponents of austerity, obliged by a budget-obsessed political climate to fight their battles one day at a time, Summers’s call for patience makes him a valuable ally. But the more important point lies not in the argument he makes about our current moment, but in what he concedes, without any reflection, is the correct policy for returning to “normal” conditions.
Notice his repetition of the word normal. This signifies a belief that Summers shares with many economists: that the market system trends naturally toward an end state of full production and high employment. The economy can be displaced from this “normal” condition by a shock or a crisis, but when the shock passes, “recovery” begins—and once “recovery” is under way, progress toward “full recovery” is inexorable. This belief runs so deep among economists as to be practically primal; it is also built into official U.S. government forecasts, coloring the worldview of legislators and presidents.
From this belief it follows that, as soon as the country enters a recovery, the job of economic policy is to manage a “soft landing.” By this, economists mean that we must start to concern ourselves with the problems that come with too much employment: price inflation, higher interest rates, aggressive unions, big wage increases, and the “crowding out” of private investment by public borrowing. For Summers, these worries are second nature; they are what policy should address once a good recovery gets going. Austerity’s time will come—we’re just not there yet.