Last week, we reported on the epiphany of Larry Summers. In his speech to the IMF, Mr. Summers reluctantly admits our economy has structural problems that stimulus can’t fix. This was a watershed moment in economic policy. If you didn’t know from the content, you would certainly know it from the reaction.
Understandably, people want to pillory Summers because much of this failed policy was his idea. You have to give the guy credit, though, for recognizing a mistake and admitting it publicly. Less flexible thinkers have been caught off guard. Paul Krugman is here, rearranging his position so that he continues – retroactively – to have been right all along.
Apparently our structural problems, demographic challenge, and persistent trade deficit are news to Dr. Krugman. He is still not changing his policy, though. It just means we’ll need fiscal and monetary stimulus for much longer than expected.
Jeffrey Sachs was more satisfying. He repeats his call for a new framework to stimulate private investment in new industries – not “the old standard-bearers of housing, cars, and consumer goods.” This sounds a lot like the restructuring Robert Dugger recommended for Japan. Coincidentally, the Economist has an update on that. Japan’s economy is stifled by red tape and bureaucracy. We are truly following their footsteps, just as Dugger predicted.
There is an investment shortfall because the financial, regulatory, and policy barriers to high-return investments have not been addressed.
Sachs has the most practical solution we have heard, although we are a little wary of public-private investment schemes. Jeremiah would like to try private-private solutions first. Japan’s MITI worked well until it didn’t, and central planning in America – except for DARPA –has a pretty poor record.
Summers may have been the first to say it out loud, but we find this (emphasis added) in the FOMC minutes from October:
Participants also considered scenarios under which it might, at some stage, be appropriate to begin to wind down the program before an unambiguous improvement in the outlook …
So, the establishment is preparing for an early end to the stimulus – no digging ditches and filling them up, no alien invasion. We will have to knock down those policy barriers or, as the entrepreneurs say, “get government off my back.”