Bernanke and Summers: Thing 1 & Thing 2


Ben Bernanke and Larry Summers

As the prospect of ending Quantitative Easing dawns over the horizon, the need to frame a new global economic policy fills the screen. Leading the way is Larry Summers, former U.S. Secretary of the Treasury. With a new federal party in power Canada may be moving there already.

Former Fed Chair Ben Bernanke’s blog post—and Summers’s response, posted 1 April 2015—underscored topics that will likely decide the next election cycle in the U.S.

Summers’s presents two alternatives for combating Secular Stagnation [1] are:

Thing (1) QE—quantitative easing, monetary policy seen running its course as the negative effects keep piling up: search for yield, market instability, income inequality, ‘bubbles’ or Ponze schemes, deflation or low demand leading to the erosion of productive capacity; and

Thing (2) FERIR—Raising full-employment real interest rate or just ‘full employment’. Fiscal policy that has been out of favor since the late 1970s and early 1980s.


U.S. Q.E. hits the $ 4.5 Trillion Mark

With interest rates trending towards zero—or lower in some European sector economies—a switch is indicated from monetary to fiscal policy. Summers’s list of new policy directions is as impressive as their absence from our society is daunting:

  1. Increase public investment (for example, build green infrastructure)
  2. Lower barriers to small business start-ups (incentivize private investment)
  3. Promote business confidence (reduce red tape; provide universal health)
  4. Recommit to the social safety net;
  5. Reduce inequality; and
  6. Redistribute wealth (the last ‘Three Rs’ are necessary for empowering spending but anathema to the right wing).

At a glance this proposal feels like a new GI Bill. Maybe even a new New Deal.

Yet, it brings into focus two primary challenges. First, reversing the dumbing down trends of mass production to make room for a greater diversification of products with priced-in quality (toasters we can use for 20 years; cutting-edge performance housing).

Second, recognizing that growth in the defence industry will bring diminishing returns as we succeed in sustaining global balance by applying global economic policy. The WWII scenario of total destruction of one region (UK & Europe) to the benefit of another (the US) hopefully will not be an option future generations will have to contend with. While recognizing that global threats have not been fully curtailed we must guard against the tendency for their over-amplification.

For example, we are seeing today how the 2003 – 2007 forays into the Middle East could have been prevented by a combination of (1) increasing domestic production of oil and renewable energies; thus (2) eliminating reliance on Middle East crude. Nothing will tame the Arab-Israeli conflict like making middle east oil supply a redundant commodity in the west.

The targets Summers identifies can be met by common sense alternatives requiring some government coordination (detractors will call it ‘intervention’). These include options discussed in this blog: switching to electric cars & transportation; retrofitting suburbs to reduce car trips and promote walking; and lowering domestic energy demand by enhancing the performance of the built environment.

Properly managed, each one of these opportunities raises FERIR by incentivizing innovation, small-business start-ups and rewarding measured risk-taking. However, the downsides to the oil and auto industry will have to be carefully balanced.

In the final analysis our governments must lead the re-energizing of the stalled western economies by shifting from monetary to fiscal policy; thus putting their money where their mouth is. The argument must be made that growing the green economy, and simply curving the worst excesses of the market economy, is good for business as well as for human health and ecological sustainability.

[1] Secular Stagnation: Facts, Causes and Cures. Tailings and Baldwin, Eds. Center for Economic Policy Research. © CEPR Press, 2014.


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