Lawrence Summers, a professor and past president at Harvard University, was Treasury secretary in the Clinton administration and an economic adviser to President Obama from 2009 through 2010.
If the global economy was in trouble before the annual World Bank and International Monetary Fund meetings in Tokyo last week, it is hard to believe that it will now be smooth sailing. Indeed, apart from the modest stimulus provided to the Japanese economy by all the official visitors and all the wealthy financial-sector hangers-on, it is not easy to see what of immediate value was accomplished. The United States still peers over a fiscal cliff; Europe staggers forward, preventing crises King Canute-style, with fingers in the dike but no compelling growth strategy; and Japan remains stagnant and content if it can grow at all. Meanwhile, the emerging economies of Brazil, Russia, India and China are unhappy in their own way with financial imbalances impeding growth in the short run and deep problems of corruption and demography darkening their long-run prospects.
In much of the industrial world, what started as a financial problem is becoming a deep structural issue. If growth in the United States and Europe had been maintained at its average rate from 1990 to 2007, gross domestic product would have been 10 to 15 percent higher today and more than 15 percent higher by 2015 on realistic projections. This calculation may be somewhat misleading, because global GDP in 2007 was inflated by the same factors that created financial bubbles, but even if GDP was artificially inflated by 5 percentage points in 2007, output is still about $1 trillion short of what could have been expected in the United States and the European Union. This works out to more than $12,000 for the average family.
Given these results, some will argue that the process of international economic cooperation is failing. It will be suggested that there have been leadership failures by the major actors. There will be calls for changes in the international economic architecture. There is some validity in all of this. Political constraints interfere with necessary actions in much of the world; certainly, international processes do not trump domestic imperatives. U.S. politics have been dysfunctional in the run-up to the 2012 election. The European Union sometimes makes the U.S. Congress look like a model of efficiency in reaching conclusions. In Russia and China, authoritarian leaders lacking legitimacy have difficulty driving economic reform. So do those with democratic mandates in India and Brazil.
Concern about dysfunctional politics and the processes of international cooperation is certainly warranted. But the best one can hope for from politics in any country is that it will drive rational responses to serious problems. If there is no consensus on the causes of or solutions to serious issues, it is unreasonable to ask a political system to implement forceful actions in a sustained way. Unfortunately, this is, to an important extent, the case regarding current economic difficulties, especially in the industrial world.
While there is agreement on the need for more growth and job creation in the short run and on containing the accumulation of debt in the long run, there are deep differences of opinion both within and across countries as to how this can best be accomplished. What might be labeled the “orthodox view” attributes much of our current difficulty to excess borrowing by the public and private sectors, emphasizes the need for credibly containing debt accumulation over the long term, puts a premium on credibly austere fiscal and monetary policies and emphasizes the need for long-term structural measures rather than short-term demand-oriented steps to promote growth. The alternative “demand support view,” while recognizing the need to contain debt accumulation and avoid high inflation, emphasizes the need for steps to increase demand in the short run as a means of jump-starting economic growth and setting off a virtuous circle in which income growth, job creation and financial strengthening are mutually reinforcing.
In recent years international economic dialogue has been defined by vacillation between these two views. At moments of particularly acute concern about growth, such as the spring of 2009 and the present moment, the IMF and many monetary and fiscal authorities tend to emphasize demand support views, but as soon as clouds start to lift orthodoxy reasserts itself and attention shifts to fiscal contraction and long-run financial hygiene.
This is a dangerous cycle whatever your economic beliefs. Doctors who prescribe antibiotics warn their patients that they must complete the full course even if they feel much better quickly. Otherwise, they risk a recurrence of illness and, worse, the development of more antibiotic resistance. So it is with economic policy. Advocates of orthodoxy prize consistency. Those like me whose economic thinking emphasizes promoting demand worry that expansionary policies carried out for too short a time prove insufficient to kick-start growth while discrediting their own efficacy and reducing confidence.
The Tokyo meetings may not have had immediate impact. But the IMF’s emphasis on the need to sustain demand and the recognition of the importance of avoiding lurches toward austerity can be critical for the medium term if they are sustained through the next round of economic fluctuations.