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Home Publications Blogs Beat the Press Larry Summers Gets It Right on the UK

Larry Summers Gets It Right on the UK

Monday, 05 May 2014 07:11

Larry Summers had a good piece in the Post pointing out that the recent growth in the United Kingdom should not really be cause for celebration. He notes that the U.K.'s economy is growing in part because it has moderated its austerity and also in part because it appears to be carrying through policies that are deliberately designed to re-inflate its housing bubble. The latter policies are likely to have disastrous consequences in the near future, but may help the government win the election next year.

Comments (10)Add Comment
written by dax, May 05, 2014 7:31
"He notes that the U.K.'s economy is growing in part because it has moderated its austerity and also in part because it appears to be carrying through policies that are deliberately designed to re-inflate its housing bubble."

I presume Dean would celebrate the moderation in austerity. He only dislikes the reinflation of the housing bubble.

Myself, I can't really tell too much difference between government A, which runs a huge deficit, and government B, which provides guarantees to banks which unwisely loan money to consumers to buy expensive houses. In both cases, five years from now, the governments are going to be in a big hole; and myself I'm not able to calculate which hole would be bigger.
written by medgeek, May 05, 2014 8:02
Nice piece--thanks for the heads up. Jonathan Portes (referred to by Krugman) made similar points last month:

@DAX Some debt is better than other debt
written by Jeffrey Johnson, May 05, 2014 8:28
@DAX Perhaps you can't calculate because all you see is debt. You also need to consider interest rate and what the borrowed money is spent on. Perhaps you could see the difference between two companies who borrow X dollars, A at very low interest rate near zero, and B at a much higher rater. Also, A invests the borrowed money in income producing capital expenditures, and B buys corporate jets, gives executives bonuses, and adds other perks for existing employees. Are they now both in a hole? No, only B is in a hole. A has grown, and paying off the loan becomes easy over time. This same applies to governments. Deficit spending at historically low interest rates on infrastructure and employment is an investment in growth and revenue in the future.
Because of Death,Taxes, and the Printing Press
written by sherparick, May 05, 2014 9:14
@DAX because Government A is, as Thomas Hobbes stated, Leviathan, it is functionally immortal so it has an infinite amount of time to pay off the deb, as well as tax people or print money that people need to pay the taxes, to pay off the debt. But Sap A, who has bought a townhouse in Bexley with no down payment and mortgage 10 times his earnings. If Sap A loses his job, or dies, then payments stop and the property passes to the bank. That's okay if there are only a few Saps, but if there are a lot saps, then bank has a problem (the asset price on which the loans are based collapses so all the Saps stop their mortgage payments). The bank then turns to Government B to tax, borrow, and print money to make good the losses and keep the banks CEO in the lifestyle to which he become accustomed.

However, I would note that London property market is not completely a bubble, but a case of "location, location, location." London is now a favored second home for .01% from both the former Empire, Russia, and Eastern Europe. Many American .1% now have a home in London both for visits and investment purposes. With world population of 7 billion, even .1% of that is 7 million people, which wold fill up quite a bit of London.
written by dax, May 05, 2014 10:15
@JJ. OK, but according to Keynesian theory (AFAIK mind you), it doesn't matter what the government purchases. So while *I* agree it's better to spend the money on infrastructure than corporate jets, Keynesians would be just as happy (or at least happy) if the government spent its money on the same things the individual borrowers are buying. That is, suppose government A defict spends by stocking up on corportate jets for its ministers.

@sherparik. Actually, I'm supposing the individual borrower goes bankrupt, gives the house back to the bank, the bank is in threat of going under, and so the government B bails out the bank in five years. So in both situations A and B the consumer is debt-free, while the governments owe a lot of money five years down the road.
Debt is a huge non-problem.
written by Ralph Musgrave, May 05, 2014 12:00

Contrary to Dax’s and Jeffrey Johnson’s claims, a government which borrows a large amount simply to stimulate demand and without doing a larger amount of investment than normal is not in a hole. Dax and Jeffrey both treat government and its debts like the debts of a micro economic entity like a household or firm. The two are as different as chalk and cheese.

If creditors start demanding more interest, such a government and it’s central bank can simply print money and pay off creditors, which exactly what governments have done on an unprecedented scale recently in the form of QE. And if that results in excess demand and excess inflation, the relevant government can tone that down by raising taxes.

As numerous advocates of Modern Monetary Theory have pointed out, a government that issues its own money can pay any rate of interest on its debt it likes: a point which a mile above the head of 90% of the economics profession.
Larry Summers Gets It Right on the UK?
written by Larry Signor, May 05, 2014 4:36
What happened that Larry Summers Got It So Wrong on the US?
That's the story that we should concern ourselves with. Now he gets kudos for good advice and analysis of the UK economy? What about the professional consequences of being so wrong? Another R-R, Simpson-Bowels story of poor memory.
I'm not interested in Larry Summers.
written by Ralph Musgrave, May 06, 2014 3:57

Larry Signor,

I agree. Summers in his famous “secular stagnation” speech at the IMF at the end of last year claimed that aggregate demand is low and there’s nothing we can do about it: an absurd argument. But now he’s claiming that austerity is a bad idea, implying that we CAN DO something about inadequate demand.

I suspect people only pay attention to him cos he’s famous. If he said re-introducing slavery would solve our economic problems, 90% of the population and half the economics profession would take him seriously.

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Fine, just don't let him create policy!
written by Dave, May 06, 2014 12:52
So Summers can recognize his past errors when we point them out to him. Just don't let him get involved in policy other than repeating what better economists tell him to say.

What kind of economist would have advocated repealing Glass-Steagall without understanding the banking system or the failures of the first Great Depression? Larry Summers, Robert Rubin and the like.

I'm not even an economist and I know more about banking history and its effect on the economy than these guys.

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Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.