Summers Floats Idea of Sustained Government Stock Purchasesby
Industrialized world facing low neutral rates for long period
Central banks nearing ‘end of the rope’ with current tactics
Former U.S. Treasury Secretary Lawrence Summers floated the idea of continuous purchases of stocks as a potential ingredient in a recipe for the developed world to strengthen economies struggling with subdued growth and inflation.
Among the proposals that deserve “serious reflection” is the purchase of a “wider range of assets on a sustained and continuing basis," Summers said in a lecture at a Bank of Japan conference in Tokyo Friday. "I’m not prepared to make a policy recommendation at this point,” he told reporters later.
Summers, who also served as a top economic adviser to President Barack Obama, reiterated his concerns about “secular stagnation,” where trend economic growth rates have been reduced and neutral interest rates are lower than historic norms. To the extent that low neutral rates are in part the consequence of investors preferring fixed-income assets and steering clear of riskier options, policy makers can combat that by buying risk assets, he said.
Japan has “engaged in that type of transaction to much greater extent than other countries,” Summers said, pointing out among its initiatives the BOJ’s purchases of exchange-traded funds. “It is something that economic logic suggests should be considered in other places where the zero lower bound is a potentially important monetary policy issue,” he said, referring to the perceived lower limit for benchmark rates set by central banks.
“There are obviously important political and economic questions associated with government ownership of companies,” Summers noted. Some critics could term such a policy as “socialism,” he said, while others could highlight that governments already buy stocks in other ways, such as in the U.S. for federal employee pension funds.
The president emeritus of Harvard University also argued that the most important dynamic holding down long term inflation-adjusted interest rates is that technological advances mean that $1 of saving buys more effective capital than ever before. He noted that Google and Apple Inc. struggle to figure out what to do with their surfeit of cash.
“In a world where cutting-edge technology companies are awash with excess cash, it can hardly be a surprise that there is substantial downwards pressure on the level of real interest rates,” Summers said. Low neutral rates will be around “for a long time to come,” requiring policy makers to think more dynamically, he said.
As for the measures taken by central banks so far, the economist said “we are fairly near the end of the rope.”
“Perhaps there is scope to reduce short-term interest rates a little bit more and to make them a little bit more negative,” he said. “But there is not much scope.”
Summers reiterated his endorsement of central banks adopting a target for nominal gross domestic product, rather than inflation. That would offer greater flexibility to let price levels rise to compensate for years of sub-par performance, he said.
He urged greater monetary-fiscal coordination, and said the BOJ’s adoption of yield-curve targeting is potentially constructive. Successful targeting “operates in a positive way with respect to the government’s budget constraint, and therefore should enable more expansionary fiscal policies.”
The other key area for policy innovation lies in finding ways to boost the neutral interest rate. Summers listed three categories:
- Higher fiscal spending
- Reduced barriers to public investment
- Measures to promote consumer spending, such as enhanced public pension benefits that would reduce consumers’ need to save
He argued against structural reforms, such as concerted labor-market deregulation, saying that this would serve to promote saving, by generating less certainty for workers.