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Summers' Summary

For a good summary of the Obama administration’s approach to the economy, it’s worth listening to the speech last Friday by Larry Summers to a meeting in Washingon of the Inter-American Development Bank. Summers acknowledges that we are not in an ordinary recession, but a deep downturn that occurs three or four times a century and that defies the tendency of the market to be self-equilibrating. Summers made the case that the economy is no longer in a vertical tailspin, but he suffered a conspicuous cough at the very moment he pronounced the current economic results “mixed.”

There was one statement, however, that really got my attention. Here is my transcription from the video (regard this as a warning about accuracy):

The experience of the late ‘90s, and especially the experience of the middle part of this decade, rested too much on the bubble in assets markets, on the consumption that was spurred by these bubbles in asset markets, on a false sense of confidence and complacency, and in some place, on unsustainable expanstions in the finance services sector. Shouldn’t in retrospect it have been a warning when 40 percent of U.S. corporate profits came in one year from the financial sector? And so, perhaps, this is a moment to reflect on the kind of expansion we want next to have. One that I hope would be less driven by asset price bubbles and more by investments in key public areas.

One would have expected Summers to say that he wanted the next expansion driven by expansion in what’s often called the real private economy--computer chips, care, airplanes, software--but not “investments in key public areas.” The former is the conventional view of the alternative. But there is another view, which, perhaps, Summers was embracing: that is, that these investments in private industry, while important for our trade balance and viability as a nation, do not provide sufficient employment and demand to buoy the economy; that they are subject to what historian Martin J. Sklar called the “disaccumulation of capital”--where private goods expansion provides an overall reduction in employment; and that the critical area of demand,which will keep the economy sustained, is in public services like health, education, and housing. These investments have to be triggered and sustained by public spending and by the growth of the public sector at the expense of the private. I am not sure whether Summers meant that--the video doesn’t include question and answer. If he did, it’s not the orthodox presciption for recovery, but it may be one that better reflects the reality of post-industrial America.

--John B. Judis