NEC Director Summers at Peterson Institute

July 17 - President Obama's chief economic adviser Lawrence Summers spoke today to the Peterson Institute for International Economics on "Rescuing and Rebuilding the U.S. Economy". Key points:

-         When the administration took over, the U.S. economy was "at the brink of catastrophe" and "the economy was in free fall". Six months later, things look better although challenges clearly remain.

-         The number one priority for the administration (as it should be for everyone) remains ensuring economic recovery. U.S. "creditors and intellectually honest deficit hawks" should recognize that the greatest risk to the U.S. debt and deficit picture remains "uncontrolled economic contraction" in the U.S.   

-         The experiences of Japan in the 1990s and the U.S. during the 1930s Great Depression show that it is dangerous to withdraw stimulus prematurely.

-         Stimulus will be sustained as long as necessary - but no longer than necessary.

-         The President is committed to lowering the debt ratio once the economy has recovered. The administration is well aware of risks down the road if inflation gets out of hand (a lesson from the 1970s). They are also aware of the need for long term fiscal sustainability.

-         Recovery however will take time. There are few examples of success in rapidly restoring economic growth and financial sector stability.

-         Unemployment will likely increase in the coming months, but the stimulus package (the American Recovery and Reinvestment Act or ARRA) is on track as expected. Its impact on jobs was not anticipated to be large this year but was always forecast to peak at the end of 2010. 

-         That being said, unemployment has been higher than usual, at a given level of growth. In the recession, the relationship between GDP and unemployment has not been normal. Unemployment has moved 1-1.5 percentage points higher than anticipated, and productivity (GDP per employee hour) has been stronger. 

The reason for this change is not clear, although perhaps increased financial pressure on firms has led them to increase layoffs or leave jobs unfilled in an attempt to improve cash flow. (Similar firm behavior was evident in the past 2 recessions.) The unexpectedly high increase in unemployment may also reflect more than simply weak demand, and may require structural change ahead, which was not specified. (Basic employment market trends and related  employment and training efforts for the 21st century workforce are discussed in the Council of Economic Adviser's report "Preparing the Workers of Today for the Jobs of Tomorrow", released July 13th.)

[Comments:  if the unexpected rise in unemployment is related more to structural issues than weak aggregate demand, arguments for another stimulus package similar to the ARRA would be undercut, since the basic objective of another stimulus would be to boost aggregate demand more. If however it is determined that the unexpected rise in unemployment is related to a too rosy scenario used for the stimulus package at the beginning of the year, the administration will remain under pressure to add more stimulus. Perhaps this discussion will be drawn out when the CEA presents its August 14 report on the employment impact of tjhe ARRA.]

-         On health care reform, the CBO has been reasonable in its assessments of the various plans to-date. The administration will not attempt to get credit for the parts of its plan which are difficult to score (IT and wellness were mentioned), but it will continue to push for change because it is the right public policy. The administration supports fully financed health care reform.