Former Treasury Secretary Larry Summers says the dangers facing the world economy today are more severe than at any time since the Lehman Brothers bankruptcy in 2008, and we all know how that turned out. “The problem of secular stagnation – the inability of the industrial world to grow at satisfactory rates even with very loose monetary policies – is growing worse in the wake of problems in most big emerging markets, starting with China,” he said in an op-ed in The Washington Post.
The respected economist David Malpass, president of Encima Global LLC, is fixated on the same problem. “The International Monetary Fund lowered its estimate for world GDP to $73.5 trillion for 2015 and $76.3 trillion for 2016,” he wrote in The Wall Street Journal. “That’s down a combined $18 trillion from estimates a year ago. The bottom line is that the IMF now believes the world economy will be smaller in dollar terms in 2016 than it was in 2014.”
Both Summers and Malpass lament the Federal Reserve’s failure to offer a coherent strategy to revive economic growth. “After seven years of emergency policies, it is vital that the Fed try something new,” Malpass said. “If not a rate increase, it should consider other growth-oriented options: tapering its huge bond reinvestment program to free up collateral for credit markets; shifting some of its borrowing away from banks to encourage bank lending; or shortening the maturity of is bond portfolio to relieve some of the illiquidity in bond markets.”
“The central banks of Europe and Japan need to be clear that their biggest risk is a further slowdown,” Summers said. “They must indicate a willingness to be creative in the use of the tools at their disposal. With bond yields well below 1 percent, it is doubtful that traditional quantitative easing will have much stimulative effect.”
“The Fed has tools that would help,” Malpass said. “Commercial and industrial loan growth surged to a 20 % annualized rate in April 2014, when the Fed was reducing its bond purchases and borrowing more from repo markets instead of banks. Using repos the Fed can borrow more cheaply from money-market funds, as well as Fannie Mae and Freddie Mac, than it can from banks. That saves taxpayers a bundle and returns cash to the banking system for lending to small borrowers and job creators.”
Summers says long-term low interest rates radically alter the possibilities of fiscal policy. “The case for more expansionary fiscal policy is especially strong when it is spent on investment or maintenance.” The problem before 2008 was too much lending, he said, but “many more of today’s problems have to do with too little lending for productive investment.”
One way to interpret that is that this is an excellent opportunity for government at the federal and state levels to crank up investments in infrastructure which is sorely needed. The money spent on highways, bridges, airports and waterways does more than create jobs directly. It pumps money into the economy that supports all manner of consumption and investments and makes us more competitive.
Both Summers and Malpass make a compelling case that we have to get away from traditional thinking about the economy – and embark upon new, more daring approaches. That goes against the political grain in a time when our political system is in disarray. But we have to take dramatic action lest we sink into an endless quagmire of lackluster growth.
Jerry Jasinowski, an economist and author, served as President of the National Association of Manufacturers for 14 years and later The Manufacturing Institute. Jerry is available for speaking engagements. October 2015