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Larry Summers’ interview with Corriere dell Sera: the English-language transcript

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16.01.2020
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16 gennaio 2020 (modifica il 16 gennaio 2020 | 10:55)

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Europe and Japan are engaged in black-hole monetary policy. You also add that the US may follow suit as a result of a recession. What do you mean by that?

«By black-hole monetary policy I mean what Keynes referred to when he talked about liquidity traps. I mean a situation where interest rates are very low, or near zero, and it’s very difficult to get to a situation where one can safely raise rates. Japan has been at or very near zero rates for more than a decade and it’s been trying to escape but hasn’t really succeeded. Europe doesn’t seem to me to be in prospect of being in a position to raise interest rates significantly in the foreseeable future and the fact that German 10-y Bunds carry a negative yield suggests markets share my expectation that rates will be very low for very long. I think the US is one recession away from being in a similar situation. Historically in order to effectively combat recessions a 5% reduction in interest rates is required and obviously the US is not going to be in a position to do anything like that».

And Europe even less so…

«Correct».

By implication fiscal policy will be particularly important. However, when you look both at the fiscal stance in Europe and at the rules, all is engineered around the opposite problem: how to be thrifty.

«I think we need to switch from rules that are predominantly pro-cyclical to rules that emphasize the countercyclical, if we are going to succeed in stabilizing our economies. And ultimately stabilizing our economies is going to pay for itself or close by making possible more output and more tax collections as a result and less transfer payments».

So, is fighting profligacy a false problem?

«It’s not completely a false problem. Obviously in Italy it’s been a problem at many points in the past, but I don’t think profligacy is our dominant problem today. I think the dominant problem in the macroeconomic arena is lack of demand and consequent tendency towards slower inflation or even towards deflation. I think we ‘ve got to think about ways of making sure that when the economies slow down, fiscal stimulus is delivered immediately and certainly make sure that at moments when economies slow down, there isn’t the imposition of perverse fiscal policies that actually withdraw stimulus».

Let’s imagine recession strikes in the US and Italy. In the US fiscal deficit is already 4.6% of GDP and in Italy public sector debt is well above 130%. Do you think under those circumstances it would still make sense to pursue fiscal stimulus? What are the limits that you see?

«I think there are some limits. It all depends very much how the money is used. If the money is used in ways that are unproductive, and represent unproductive consumption, then I think particularly when deficits are already a serious problem, that can be quite problematic. When on the other hand the money is used is ways that support the expansion of capacity, such as is the case for example with infrastructure investments, then the effect will be to reduce rather than increase the burden of future generations. The important thing to remember is that we are focusing on the interests of the next generation. We hurt the next generation when we borrow too much money but we probably hurt the next generation even more when we defer maintenance on infrastructure, because those costs compound even faster than the cost of borrowing money».

Would it make sense to review EU fiscal rules so that they could be more discriminating?

«I don’t think EU fiscal rules are well designed for........

© Corriere della Sera