Principles for Economic Recovery and Renewal
Summers, Lawrence H., Business Economics
Over the past year, substantial progress has been made on the path to economic recovery. Yet, as true with most recessions induced by a financial crisis, recovery is going to be long and slow. This is particularly true for employment. Moreover, there is evidence that indicates there are structural as well as cyclical concerns about this recovery's slow employment growth. The personal as well as macroeconomic costs of this slow growth mean that there is no higher public policy priority than economic recovery and job creation. This address presents and discusses three guiding principles for economic policy: restoring confidence, increasing aggregate demand, and achieving broader and deeper education.
Keywords: employment growth, recovery, economic policy, confidence, aggregate demand, education
Business Economics (2010) 45, 3-7.
When I last spoke at the National Association for Business Economics in 2008, I sought to survey the economic landscape in which the United States found itself. Our country faced profound challenges: the recession, financial repair, health care, energy, globalization, and inequality. Little did we know at that time how serious our problems would become. And little did I know of the opportunity I would have to work by President Obama's side as he sought to take on all those challenges during the momentous first year of his Presidency.
My topic here is more focused than the range of issues I addressed a year ago. It is the topic of economic recovery and the prospects for job creation. That assessment begins from an evaluation of our current situation.
From a financial perspective, the evidence that we have made very substantial progress is clear. Consider, for instance, the trajectories of 15 or 20 major credit spreads during the past two years. If we take as "normal some level prior to the most eXtreme bubble valuations, and then look at the peak after the collapse of Lehman Brothers, and then ask where we stand today, it turns out that we have normalized between 50 and 100 percent with most credit spreads.
The stock market shows strong signs of recovery, too. Whether we measure stock market volatility on a flow basis or on an eX ante basis as inferred from options, the eXtent of volatility--a proXy for uncertainty in the stock market--has fallen very substantially. The stock market has rallied in a way that would have seemed quite remarkable if forecast in the first months of 2009. The major indices have risen 50 percent from their lows.
We are even witnessing early signs of stabilization in the housing market in many parts of the country. Moreover, while the quantity of credit flows remains very low by historic standards in a number of key sectors, the pricing of credit flows has substantially normalized.
Our eXperience so far has not called into question the tendency that I stressed in my 2008 remarks: recessions associated with financial over-leveraging and with the bursting of bubbles have tended to entail longer and slower recovery paths than recessions associated with actions by the Federal Reserve that slammed on the brakes and produced a spike in interest rates. It is not hard to understand why the empirical reality should be this way. If a recession were caused by hitting the brakes hard, it could be uncaused by taking the foot off the brakes. If it were caused by something other than policy, it is less readily within the purview of policy to bring about a rapid turnaround.
Nonetheless, whereas nine months ago we were debating whether the recession would become a depression, today we are debating what the end date of the recession was and what our path to recovery will be. Most observers eXpect growth in the second half of 2009 at rates in eXcess of the economy's long-run potential, fueled by the inventory cycle and by the stimulus provided through the American Recovery and Reinvestment Act of 2009(ARRA). …