By Paolo von Schirach
October 15, 2013
WASHINGTON – Larry Summers did not manage to become the new Chairman of the Federal Reserve. However, he is still one of the smartest economists in America. In a recent piece published by The Financial Times, (The Battle over the budget is the wrong fight, October 14, 2013), Summers argues that the Washington epic battle over the budget, spending, debt and the debt ceiling, (with the government shut down and the rest of it), is essentially the wrong fight, because politicians have focused on the wrong issue.
Debt is not an emergency
He points out that while we do have a systemic problem caused by the mismatch between revenue (too little) and spending (too much), this is not an emergency. In the medium term America’s debt, while considerably higher than at any point in recent history, (except for the exceptional period during WWII), does not represent an emergency. At the same time, policy changes aimed at reducing the debt would have a minimal, if any, impact on economic growth.
Lack of growth is the problem
And economic growth, or lack thereof, is precisely America’s biggest challenge, says Summers. the US economic engine stalled. Sure enough, we are mercifully out of the terrible 2008-2009 recession. But this has been the worst recovery in modern history. We are advancing at a modest 2% pace, while the historic post war average has been 3%. This 1% a year makes a huge difference.
Summers stated in his article that it would much wiser for Washington policy makers to focus on measures that would spur economic growth. Economic growth means more enterprises created, more jobs, higher incomes, the broadening of the tax base. Sustained growth also means more revenue and therefore lower annual deficits; over time this translates into a lower debt to GDP ratio. The bigger America’s GDP, the less consequential the national debt.
New investments in our competitiveness
Summers has his agenda. We need more investments in infrastructure to improve our national productivity. We need fewer regulations. And we should welcome more investments in education and R&D. At the same time, we should capitalize on the significant “energy advantage” America is now enjoying thanks to added oil and especially natural gas production.
Find common ground on pro-growth policies
In the end, while the national debt is important, it should not be this all-consuming and extremely divisive issue. At present, America is not facing an over spending emergency. America is facing however the consequences of slow growth. We have a shrinking middle class. This entails lower tax revenue, and less spending power for millions of people. Add to that reduced competitiveness due to crumbling infrastructure and declining R&D spending.
From a purely political stand point, which elected national leader can be against growth? Therefore it should be easier to find common ground on pro-growth policies. Let’s abandon the fight over the debt and let’s find agreement on growth.