By Lawrence Summers
Feb 10 After the U.S. economy grew at a rate of 1.5 percent over the four quarters of 2012, the Congressional Budget Office projected last week that it will under current law grow at only 1.4 percent during the calendar 2013 and that unemployment will rise during the year.
Its estimates imply that the gap between what the U.S. economy is producing and its potential, which is currently in excess of $750 billion or $10,000 per family, will actually increase by more than $100 billion during the next year. While the CBO looks for growth to accelerate in 2014 and beyond, its projections do not call for a return to normal economic performance until 2017.
While there is much that economists and policymakers of different persuasions disagree on, there should be consensus that growth performance at these projected levels is our most serious national problem. It makes growth in middle class incomes impossible, puts pressure on budgets by holding back the economy and tax collections, and threatens future economic performance by pressuring forward looking expenditures on everything from corporate R&D to training young workers. Perhaps most importantly, it weakens the power of the American example at a very dangerous time in several parts of the world.
With financial strains receding and the economy catching some tailwinds from low interest rates and stock markets, huge opportunites for investment associated with producing low cost domestic oil and natural gas, a housing sector that is now turning around, and re-shoring in manufacturing, this may be the best moment of opportunity the American economy has had in nearly a decade.
Confidence is the cheapest form of stimulus and there is now the possibility of the economy achieving escape velocity with a virtuous circle of confidence, growth and deficit reduction propelling the economy forward as it did in the 1990s.
But as important as they are, it will take an economic policy focus that extends well beyond deficit control issues. Reducing prospective deficits is necessary to avoid risking financial accident, but unlike in the 1990s when reduced deficits stimulated investment by bringing down capital costs, deficit reduction cannot be relied on to provide stimulus when long term Treasury yields are below 2.0 percent.
Here are four areas where the deep ideological cleavages between the parties need not be an obstacle to meaningful policy action.
First, as the President has recognized the budget cuts implicit in the upcoming "sequester" now scheduled to be implemented at the beginning of March should not be reduced but should be spread out over time. With the economy already taking a significant hit from the elimination of the payroll tax cut, it is misguided fiscal policy and potentially dangerous national security policy to allow meat cleaver cuts that were designed to be disastrous to go suddenly into effect.
Second, a firm end-of-2013 deadline needs to be set for the corporate tax reform debate in its international aspects. We are now in the worst of all worlds. U.S. corporations, disproportionately those in technology, have a sum approaching $2 trillion in cash sitting abroad in large part because it is currently highly burdensome to bring it back, and they believe there is a prospect that they will get relief on repatriated profits in the not too distant future.
Given corporations' eagerness to bring the money back to the United States either to reinvest it or to distribute it to restive shareholders, I suspect it should be possible to find a formula where they get some relief on repatriation but unlike with past repatriation holidays, the government does not suffer a long-run revenue loss. This would be ideal. But even if it cannot be achieved, clarity that no break is coming in the future would act to encourage reinfusion of funds held abroad back into the American economy.
Third, no one regardless of their ideology should be satisfied with the way the nation's system of housing finance is currently working. After a period when mortgages were too available and too cheap, the pendulum has swung too far and lack of finance is inhibiting the housing recovery. Substantial efforts by the Federal Reserve to bring down the interest rates on existing mortgage-backed securities have had only a limited impact on the rates charged to those taking out new mortgages or refinancing old ones.
In part because of limitations on mortgage credit, many middle income families are renting homes with far higher monthly payments than they would have as homeowners, with the extra yield and future appreciation going to the large investors who will enjoy not just high yields but capital gains as the housing sector recovers. The GSEs Fannie Mae and Freddie Mac have as their historic function providing countercyclical support to the mortgage market. It is high time they be forced to step up.
Fourth, priority needs to be attached to accelerating the development of North American energy resources for both economic and environmental benefit. Decision making on the Keystone Pipeline needs to recognize that oil from Canadian tar sands that does not flow to the United States will likely over time flow to Asia where it will be burned with fewer environmental protections. Plans to exploit natural gas resources need to be made with the awareness that over the next decade replacing coal with natural gas has much more scope to reduce greenhouse gas emissions than more fashionable efforts to promote renewables. And both the production and the use of natural gas which looks to be relatively inexpensive for years to come can be a substantial job creator.
More items could be added to this list. Unlike cutting a budget where there have to be losers, polices to spur growth can benefit all stakeholders. If the conversation about economic policy can give at least as much weight to growth and job creation as it has to fiscal issues there is the prospect that we can improve the tone of our policy debates, and over time reap the defict reduction benefits of a stronger economy.
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