Former Treasury Secretary Lawrence Summers said he expects healthy economic growth in the U.S. this year and next and doesn’t see a “need to panic” over a March employment report that shows slowing job creation.
Summers, who directed President Barack Obama’s National Economic Council for the administration’s first two years, said the economy should expand this year at a rate “north of 2.5 percent.” Next year, there’s “a good chance for above 3 percent” growth, he said in an interview on Bloomberg Television’s “Political Capital with Al Hunt,” airing this weekend.
The Labor Department reported yesterday that payrolls grew by 88,000 in March, the smallest gain in nine months and lower than the most pessimistic forecast in a Bloomberg survey of economists.
Summers said the economy’s “basic momentum” is still “growing at a rate that is closing the unemployment gap.”
Surveying the international scene, he cautioned that the disarray surrounding the European-led bailout of Cyprus may do lasting damage to the region.
“It seems to me the awkwardness with which they handled the Cyprus situation has got to have created a substantial sense of unease in Europe, and that is something that I think is worth worrying about,” Summers, 58, said.
Euro-area leaders are struggling to stabilize the region after a month in which they fumbled a rescue of Cyprus and the euro fell to its lowest level of the year against the dollar. The International Monetary Fund said April 3 it would contribute about 1 billion euros ($1.29 billion) as part of a 10 billion-euro rescue package for Cyprus.
Conversely, Summers applauded Bank of Japan Governor Haruhiko Kuroda’s move this week to embark on record easing as “a bold experiment” to end 15 years of deflation in the country. The Bank of Japan’s move means the world’s four biggest developed-market monetary authorities -- BOJ, the Federal Reserve, the European Central Bank and the Bank of England -- are aligned in commitments to spur growth and return their economies to full strength.
The BOJ said it will double the monetary base by the end of 2014 through purchases of government bonds, in Japan’s biggest-ever round of asset purchases.
“On the evidence of the Japanese stock market, on the evidence of expectations in Japan over the last several months, you’d have to say that there’s a positive verdict on what they’ve been doing so far,” Summers said.
Even so, he said that the effectiveness of the new Japanese monetary policy will become clear only over time.
‘Coiling a Spring’
“When you’ve had macro-economically irresponsible policies in the past, they often produce benefits that are very great for the first number of months and, like coiling a spring, provide for problems later,” Summers said.
He said the U.S. Federal Reserve’s quantitative easing policy continues to be justified by economic conditions, as the risk of a slowdown still outweighs the risk of accelerating inflation.
On the federal budget, Summers said that an Obama plan that includes cuts to entitlement programs such as Social Security and Medicare “will remove a lot of the excuses” for Republican congressional leaders “who do not want to negotiate” with the president. Democrats and Republicans are currently locked in a stalemate over federal budget deficits.
Obama’s budget plan, to be unveiled April 10, will call for reducing Social Security recipients’ annual cost-of-living increases by changing the measure of inflation used, according to an outline the White House released. For Medicare, the president will propose reducing payments to drug companies and health care providers and imposing higher costs on high-income beneficiaries.
Summers said the budget “is balanced. It recognizes that entitlements have to be part of an ultimate solution.”
He predicted little chance that the White House and Congress would soon agree on an overhaul of the tax code.
“Of all the propositions that there are, probably there are none that would command support across a wider range of economists than the idea that a broader base and a lower rate is fairer and makes the economy grow,” Summers said. Still, he added, “I wouldn’t be betting on it.”
Since his departure from the Obama administration, Summers has returned to Harvard University, where he is now an economics professor at the Kennedy School of Government.