Larry Summers: "Welcome To The Non-Recovery" Or "Fiscal Stimulus Or (Another US) Bust"

Tyler Durden's picture

Just under a year ago, we got the tax fraud, and the only remaining member of Obama's economic Titanic, praising the US recovery. His timing top ticked the economy, preceded the Hindenburg Omen by 10 days, and ushered in QE2. Now, we get his sidekick, long since departed after totally failing (we use the more polite F-form of the word) up at his job, writing the follow up, from the cushy confines of academia, warning America that unless there is a major fiscal stimulus (because presumably the monetary stimulus which everyone praised in the form of QE2 has now been proven to only be a boost to the stock market and a bailout of European banks), this once great country which once exhibited the world's reserve currency is on its way to another "lost decade." We wish Summers well: perhaps 3 of those who read the following drivel will take him seriously. Two of them are Krugman and Koo. We are taking bets as to who the third one will be...

From the Financial Times:

How to avoid stumbling into our own lost decade

Even with the 2008-2009 policy effort that successfully prevented financial collapse, the United States is now half way to a lost economic decade. In the past five years, our economy’s growth rate averaged less than one per cent a year, similar to Japan when its bubble burst. At the same time, the fraction of the population working has fallen from 63.1 to 58.4 per cent, reducing the number of those in jobs by more than 10 million. Reports suggest growth is slowing.

Beyond the lack of jobs and incomes, an economy producing below its potential for a prolonged interval sacrifices its future. To an extent once unimaginable, new college graduates are moving back in with their parents. Strapped school districts across the country are cutting out advanced courses in maths and science. Reduced income and tax collections are the most critical cause of unacceptable budget deficits now and in the future.

You cannot prescribe for a malady unless you diagnose it accurately and understand its causes. That the problem in a period of high unemployment, as now, is a lack of business demand for employees not any lack of desire to work is all but self-evident, as shown by three points: the propensity of workers to quit jobs and the level of job openings are at near-record low; rises in non-employment have taken place among all demographic groups; rising rates of profit and falling rates of wage growth suggest employers, not workers, have the power in almost every market.

A sick economy constrained by demand works very differently from a normal one. Measures that usually promote growth and job creation can have little effect, or backfire. When demand is constraining an economy, there is little to be gained from increasing potential supply. In a recession, if more people seek to borrow less or save more there is reduced demand, hence fewer jobs. Training programmes or measures to increase work incentives for those with high and low incomes may affect who gets the jobs, but in a demand-constrained economy will not affect the total number of jobs. Measures that increase productivity and efficiency, if they do not also translate into increased demand, may actually reduce the number of people working as the level of total output remains demand-constrained.

Traditionally, the US economy has recovered robustly from recession as demand has been quickly renewed. Within a couple of years after the only two deep recessions of the post first world war period, the economy grew in the range of 6 per cent or more – that seems inconceivable today. Why?

Inflation dynamics defined the traditional postwar US business cycle. Recoveries continued and sometimes even accelerated until they were murdered by the Federal Reserve with inflation control as the motive. After inflation slowed, rapid recovery propelled by dramatic reductions in interest rates and a backlog of deferred investment, was almost inevitable.

Our current situation is very different. With more prudent monetary policies, expansions are no longer cut short by rising inflation and the Fed hitting the brakes. All three expansions since Paul Volcker as Fed chairman brought inflation back under control in the 1980s have run long. They end after a period of overconfidence drives the prices of capital assets too high and the apparent increases in wealth give rise to excessive borrowing, lending and spending.

After bubbles burst there is no pent-up desire to invest. Instead there is a glut of capital caused by over-investment during the period of confidence – vacant houses, malls without tenants and factories without customers. At the same time consumers discover they have less wealth than they expected, less collateral to borrow against and are under more pressure than they expected from their creditors.

Pressure on private spending is enhanced by structural changes. Take the publishing industry. As local bookstores have given way to megastores, megastores have given way to internet retailers, and internet retailers have given way to e-books, two things have happened. The economy’s productive potential has increased and its ability to generate demand has been compromised as resources have been transferred from middle-class retail and wholesale workers with a high propensity to spend up the scale to those with a much lower propensity to spend.

What, then, is to be done? This is no time for fatalism or for traditional political agendas. The central irony of financial crisis is that while it is caused by too much confidence, borrowing and lending, and spending, it is only resolved by increases in confidence, borrowing and lending, and spending. Unless and until this is done other policies, no matter how apparently appealing or effective in normal times, will be futile at best.

The fiscal debate must accept that the greatest threat to our creditworthiness is a sustained period of slow growth. Discussions about medium-term austerity need to be coupled with a focus on near-term growth. Without the payroll tax cuts and unemployment insurance negotiated last autumn we might now be looking at the possibility of a double dip. Substantial withdrawal of fiscal stimulus at the end of 2011 would be premature. Stimulus should be continued and indeed expanded by providing the payroll tax cut to employers as well as employees. Raising the share of payroll from 2 to 3 per cent is desirable, too. These measures raise the prospect of sizeable improvement in economic performance over the next few years.

At the same time we should recognise that it is a false economy to defer infrastructure maintenance and replacement, and take advantage of a moment when 10 year interest rates are below 3 per cent and construction unemployment approaches 20 per cent to expand infrastructure investment.

It is far too soon for financial policy to shift towards preventing future bubbles and possible inflation, and away from assuring adequate demand. The underlying rate of inflation is still trending downwards and the problems of insufficient borrowing and investing exceed any problems of overconfidence. The Dodd-Frank legislation is a broadly appropriate response to the challenge of preventing any recurrence of the events of 2008. It needs to be vigorously implemented. But under-, not overconfidence is the problem, and needs to be the focus of policy.

Policy in other dimensions should be informed by the shortage of demand that is a defining characteristic of our economy. The Obama administration is doing important work in promoting export growth by modernising export controls, promoting US products abroad and reaching and enforcing trade agreements. Much more could be done through changes in visa policy to promote exports of tourism as well as education and health services. Recent presidential directives regarding relaxation of inappropriate regulatory burdens should also be rigorously implemented.

Perhaps the US’ most fundamental strength is its resilience. We averted Depression in 2008/2009 by acting decisively. Now we can avert a lost decade by recognising economic reality.

The writer is Charles W. Eliot University Professor at Harvard and former US Treasury Secretary. He is an FT contributing editor

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Noah Vail's picture

". . . perhaps 3 of those who read the following drivel will take him seriously. Two of them are Krugman and Koo. We are taking bets as to who the third one will be..."


Not me, I won't bother to read it. That's what we have you for, Mr. Durden, to wade through the cesspools so we don't have to. LOL

bigdumbnugly's picture

the third one was krugman again.

he reread it one more time it was so riveting.

Mr Lennon Hendrix's picture

The third one was Geithner, and it was so riveting he did not pay his taxes again so he could buy his icloud, because he believed that would stimulate the economy.

drbill's picture


Laughed so hard I almost dropped my copy of Keynes' "General Theory"!

Hernando's picture

As much as I wish to laugh at Summers, I can't help but remember that this clown - traitor - idiot savant along with Greenspan, Paulson, Senator Gramn of Texas, Mozilo and Rubin have destroyed the greatest country in history.


This clown along with his fellow traitors deserve a military firing squad to set an example for history.   As things get much worse over the next few years, the cries for justice will become much louder and so will the viability of the firing squad option.



Ned Zeppelin's picture

Couldn't have said it better - one can only hope that justice will have its day. 

TruthInSunshine's picture

I'd hate to see Obama being generous to  Wall Street...

Seriously...could they have had it any better?


Obama Seeks to Mend Fences and Win Back Wall St. Cash

President Obama has started an aggressive push to win back the allegiance of a vital source of campaign donations in 2008.



Ben Dover's picture

Justice is a fiction here. Firing squads and justice will be served upon many, but not upon the most diserving. W0rd.

SpiritBlade's picture

Great points,

We are entering into the days when folks are finally bailing off the fence to their respective sides. Some will go towards J. Taggert, others Hank Reardon.

I would certainly hope most of our esteemed collegues side with Mr. Galt on this. Perhaps with a smattering of Ragnar;)

Lets embrace the total collapse as a new beginning




Dejean Splicer's picture

I'll just embrace my metal, bitchez!


Freddie's picture

Summers was part of it with Hussein.  Funny watching all the little ass boys here on ZH trying to disown their hope & change votes.

SloMoe's picture

My god, he has no shame, conscience or memory...

zaknick's picture

My thoughts exactly. My guess is you will get this kind of in your face charlatans until the mob is literally taking control of everything. This fight over cuts in Washington...if I'm correct about the pain headed for a neighborhood near you, lots of people are going to be joining us in constantly saying WTF to the "news".


Problem Is's picture

What a bag of incompetent ass holes...

Fuck ups and fucktards, one and all...

ElvisDog's picture

Totally agree. Does he really believe or think that we believe that the answer to a debt saturated economy is to take on more debt? I also like this comment:

The underlying rate of inflation is still trending downwards

WTF? I suppose the underlying rate of home prices is trending downward. But energy, food,  medical care, education expenses? Not so much. The University of Washington just announced plans for a 20% tuition increase.

Conrad Murray's picture

The central irony of financial crisis is that while it is caused by too much confidence, borrowing and lending, and spending, it is only resolved by increases in confidence, borrowing and lending, and spending.

Those who can, do. Those who can't, spray shit into the air like Tubgirl.

TheGoodDoctor's picture

Conrad, have you seen the latest South Park?

Ned Zeppelin's picture

I remarked how this latest "everything is shit" episode is different from any other, and bit unnerving at that. Even the South Park boys have noticed a turn of events. 

moonstears's picture

Everybody knows he's right, more spending and credit will fix it, just as we all know more unprotected sex cures syphilis. :) 

AladdinSaneGirl's picture

He's saying to increase government spending on socially-useful tasks such as improving infrastructure, and increasing exports. This sounds a better way to stimulate the economy than printing more money for the banks ... if I've understood it correctly. At least engineering, construction shares would get a boost, presumably also oil and miners ...

docj's picture

Sorry, we already tried that.

It failed then. Miserably. And sequels allways suck worse than the original, even when the original, uh, sucks.

Freddie's picture

I know a bunch of local towns with brick & paver street sections, sidewalks, solar street lamps and other crap.  Largely with African American labor.   Anyone remember in 2008 where hussein's team said white men would not get any of these inrastructure jobs?  I saw a lot of em in progress and they were all like that.


Oh and all these paver streets fall apart fairly quickly.  They can work on a driveway but not on streets.  They crack and crumble.

Prometheus418's picture

They're working on the highway between my home and work (again.)  While there are white folks on the crews, what I did notice was that while I was driving past, there were fifteen people on the crew.  One was operating a machine, and the other 14 (yes, I counted) were standing there slack-jawed and idle.  

Nor were they doing a long-term job on the highway.  They stripped about two inches off the surface, and were replacing the concrete with asphalt, poorly.  Wavy lines, and poor blending between the lanes.

Hooray for government progress!

lizzy36's picture

Obama promoting exports, by devaluing the USD is the version of winning the future the smartest man in the room subscribes too.

Thanks i will pass.

Btw, has the smartest man in the room ever been right about anything? bueller?

Problem Is's picture

"Fat" Larry knows what's good for lunch...

         "Fat" Larry knows which meeting to sleep through...

Smiddywesson's picture

Sorry, I can't read his drivil.  He doesn't deserve a serious read.  

I know these fellas have all the best arguments for xy and z, but they are complete failures, deserving my mute button.

Dejean Splicer's picture

Ignoring will get us nowhere.

Put your spurs on, grab a fistful of mane, and dig your spurs into the loins of the beast.

Wombat's picture

I guess European banks were "shovel-ready projects."

apberusdisvet's picture

The man who came close to destroying Harvard's endowment should be consigned to the padded room where he and Timmah can argue over Anthony' s weiner, while Barney gives pointers.

Problem Is's picture

How about that padded room being the cell next to Bernie Madoff...

JustPrintMoreDuh's picture

Bwarny Fwank would more likely provide lip service re: the weiner.

Hedgetard55's picture

" Reduced income and tax collections are the most critical cause of unacceptable budget deficits now and in the future."

     Fuck you Larry. Out of control spending is the problem, something a brain dead libtard like you will never admit. You and your University represent everything I despise in this world.


Masked Man's picture

Larry Summers is hardly a liberal in his economic and social views. Read up on him.

jo6pac's picture

Yep, pure Shock Doctrine and we've been set up for the great fall.

Spastica Rex's picture

Anyone not calling for an end to all government services (except the millitary) is a liberal.

Terminus C's picture

and the military needs to be cut to one third of its current size.

Keep the nukes, fuck the rest.

falak pema's picture

how about justice? I mean real justice not GWB type justice...

Urban Redneck's picture

Reduced income and tax collections are the most critical cause of unacceptable budget deficits now and in the future.

Well at least he readily admits to the philosophy I have accused him of- 

Increased banker income and tax collections are the most critical cure for unacceptable budget deficits now and in the future.

Sudden Debt's picture

Why do you think that they bailed out Europe?

Because the derivative bombs fuse is there.

Which the US created to their benefit but a bust will also be their demise.

They didn't save European banks because Europeans are smarter, better looking...

They saved the banks because the world economy would be destroyed and the reserve currency would go up in flames.

The fact that this was more important then to create jobs and save the US economy just shows the threat.

And it's not over. it keeps on getting worse. So when it implodes it will be worse for the US economy than if they wasted the money on creating US jobs without content. The US industrial base belongs to China, deal with it and move along.

And because the European economy is actually recovering very well, there might well be no QE3 if it holds.

Sorry guys, the FED won't do a QE3 just to save the US economy. It will have to do it on it's own.

So deal with it or move to Europe.


Caviar Emptor's picture

The banks on both sides of the Atlantic were complicit. The bankers on both sides lined their pockets by pretending that more securities were needed to insure other securities which insured yet further securities against default. It was a gravy train that made many rich. And now it has stopped and taxpayers on both sides have to deal with the mess.

Masked Man's picture has been running a banner announcement all weekend long that Larry Summers is going to be writing a column on the "jobs crisis" on Monday. It sounds like it's going to be a regular column as the media is finally (after 3 years) waking up to the unemployment problem.

Larry Summers has spent most of his life in academia. He hasn't worked an honest day in his life. What exactly qualifies him to be writing a column about jobs?

Libertarians for Prosperity's picture

as a man, he has the inherent ability to understand everything.

lynnybee's picture

 " What exactly qualifies him to be writing a column about jobs? "     NOTHING !  ABSOLUTELY NOTHING !   he's an idiot, along with his criminal co-horts Robert Rubin & Alan Greenspan ........ all i see is that TIME MAGAZINE cover of those 3 so-called Masters of the Universe .     As my Dad used to say when confronted with idiots, "what a horses' ass."