Financial Times (Link) (March 8, 2009)
Barack Obama’s top economic adviser has urged world leaders to pump more public money into the economy in a co-ordinated effort to boost demand and lift the world out of recession. In an interview with the Financial Times, Lawrence Summers said the urgent need for a short-term increase in spending by governments temporarily overrode the longer-term goal of tackling the global imbalances many economists believe caused the financial crisis.
The US administration had no choice but to take strong public action to “save the market system from its own excesses”, he said.
His comments, ahead of next month’s crunch G20 summit in London, make it clear that the US administration wants industrialised nations to share responsibility for engineering a global demand-led recovery and does not believe this burden should fall on China alone.
“The old global imbalances agenda was more demand in China, less demand in America. Nobody thinks that is the right agenda now,” said Mr Summers. “There’s no place that should be reducing its contribution to global demand right now. It is really the universal demand agenda.”
While the US and other western nations should return to living within their means in the medium term, everyone should raise spending sharply now.
“The right macro-economic focus for the G20 is on global demand and the world needs more global demand,” said Mr Summers.
Widely seen as being among the most pro-market voices in the White House, having been Bill Clinton’s last Treasury secretary in the 1990s, Mr Summers said the view that the market was inherently self-stabilising had been “dealt a fatal blow”.
At a time when the Republican critique of Washington’s aggressive response to the crisis is growing more trenchant, Mr Summers made an unapologetic case for government intervention. “This notion that the economy is self-stabilising is usually right but it is wrong a few times a century. And this is one of those times . . . there’s a need for extraordinary public action at those times.”
Mr Summers’ influence in the White House is central, particularly given the difficult start to the tenure of Tim Geithner, Treasury secretary, whose nomination was overshadowed by the revelation that he failed to pay more than $34,000 dollars of taxes on time.
He put up a robust defence of the administration’s focus on tackling historically high rates of inequality in the US. But he insisted the underlying aim should be to restore the capitalist market system to health.