The Job Crisis-Listening To Larry Summers

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On June 13th of this year, Lawrence Summers, former economic advisor to President Obama and U.S. Treasury Secretary under President Clinton, gave an interview to Reuters; and while I don’t agree with him that the Dodd-Frank bill, unemployment insurance, “investments” and spending/taxing will save the day, his viewpoint is worth knowing because it is the same as this administration’s. It does not appear to be working and Mr. Summers does not explore the debt and deficit problems that accompany his call for more spending and taxing.

Mr. Summers does make it clear that the economy is sick and not recovering as the media and the administration would have us believe.

U.S. Payrolls Gap

There is a lack of demand for employees in our current economy and it is not like prior recessions, thereby calling for a different approach from the ones used in the past (Editor’s note: we have used Keynesian policies and they haven’t worked ala FDR). People find themselves over-extended and poorer than they thought they were. Demand is not there.

We want the economy to bounce back and we wait for any sign of recovery, but the fact is, the overall picture is bleak. The Democrats believe that taxing and spending will get us back by stirring the economy and the demand for employees. The Republicans believe tax cuts and less regulations are prime motivators. Both parties agree there is a lack of demand for employees but if the regulations and uncertainty strike fear into the heart of employers, should we expect a different outcome? Don’t forget that the much-praised Dodd-Frank bill puts CEO’s and CFO’s in jail if they are deemed to have lied on any earnings report. Democrats see the Bush tax cuts (which were not cuts, but a return to the pre-Clinton tax rates) as having never worked. That is an oversimplified depiction of the two viewpoints but accurate generally.

Here are Larry Summers sound clips on the issue: –
…the United States is now half way to a lost economic decade. Over the last 5 years, from the first quarter of 2006 to the first quarter of 2011, the U.S. economy’s growth rate averaged less than 1 percent a year, about like Japan during the period when its bubble burst. At the same time the fraction of the population working has fallen from 63.1 to 58.4 percent, reducing the number of those with jobs by more than 10 million. The fraction of the population working remains almost exactly at its recession trough and recent reports suggest that growth is slowing…

…Strapped school districts across the country are cutting out advanced courses in math and science and in some cases only opening school 4 days a week. And reduced incomes and tax collections at present and in the future are the most important cause of unacceptable budget deficits at present and in the future…

…That the problem in a period of high unemployment like the present one is a lack of business demand for employees not any lack of desire to work is all but self-evident. It is demonstrated by the observations that (i)the propensity of workers to quit jobs and the level of job openings are at near-record low levels; (ii) rises in nonemployment have taken place among essentially all demographic skill and education groups; and (iii) rising rates of profit and falling rates of wage growth suggest that it is employers, not workers, who have the power in almost every market…

…A sick economy constrained by demand works very differently than a normal one. Measures that usually promote growth and job creation can have little effect or can actually backfire. When demand is constraining an economy, there is little to be gained from increasing potential supply…

…They (recessions) 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 overinvestment during the period of confidence–vacant houses, malls without tenants, and factories without customers. At the same time consumers discover that they have less wealth than they expected, less collateral to borrow against and are under more pressure than they expected from their creditors. Little wonder that private spending collapses and that post bubble economic downturns often last more than a decade and are only ended through external events like military buildups…

…What then is to be done? This is no time for fatalism or for traditional political agendas that the two parties have pushed in more normal times. 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…

…What then is to be done? This is no time for fatalism or for traditional political agendas that the two parties have pushed in more normal times. 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

…Fiscal support should be continued and indeed expanded by providing the payroll tax cut to employers as well as employees. Raising the share of the payroll tax cut from 2% to 3% would be desirable as well. At a near term cost of a little over $200 billion, these measures offer the prospect of significant improvement in economic performance over the next few years translating into significant increases in the tax base and reductions in necessary government outlays.

It is appropriate that policy in other dimensions be informed by the shortage of demand that is a defining characteristic of our economy. For example, the Obama administration is doing important work in promoting export growth by modernizing export controls, promoting U.S. products abroad and reaching and enforcing trade agreements. Much more could be done through changes in visa policy, for example, to promote exports of tourism as well as education and health services. In a similar vein recent Presidential directives regarding relaxation of inappropriate regulatory burdens should be rigorously implemented to boost confidence…

…every measure that comes out of Washington needs to be evaluated on the basis that it will not reduce the demand for goods and services at a time when America’s economy has been and will remain profoundly demand constrained…Read the full article at Reuters, The Job Crisis, Lawrence H. Summers.

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