Larry Summers, President Obama’s former chief economic adviser and now returned to Harvard, has a business proposition for the US economy. And though there’s a hint of a wink to it, I think he’s deadly serious. But to read it, you have to put aside for now whatever views you might retain about his previous tenures. If you can’t do that, you can stop here.
What Summers argues on the pages of the Financial Times looks like a clever way to get the Administration to do — or at least propose and campaign on — something economically helpful while positioning their party well for the elections, even though he doesn’t mention that. It’s clever, because he makes the argument from a business person’s point of view. Indeed, the wonder is that Mr. Romney, who claims only he has the right business acumen to fix the US economy, has not thought of this first.
It’s all very simple and intuitive, based on several undisputed facts: interest rates are at record lows; we have lots of projects that need funding; and doing them sooner rather than later makes economic sense.
Paraphrasing Summers: Suppose you own a business, but demand is down, and economic recovery is slow. You expect the economy to pick up eventually, but your factories and equipment are aging and much of it must be replaced before you can crank up again. Now suppose that lenders would make available all the money you wanted at virtually zero real interest rates — that is, rates at or below the expected rate of inflation. Moreover, you’re carrying a lot of debt now, and the costs of that older debt are much higher than the costs of new borrowing now. What should you do?
Summers draws the logical conclusion that any intelligent business