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
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.