Monday, October 27, 2008

Larry Summers argues for activist policy

Larry Summers argues that policy activism, especially in the fiscal side, spurs growth (well, at least it did after the WW II). He agrees that investment in interstate highway system, air travel and electronics led to such growth rate.

The most plausible explanation is that an array of transforming investments and technologies – the interstate highway system, widespread air travel and the expansion of electronics – were spurs to growth during the postwar period.

And, he also argues for selective policy intervention—identification of investments that stimulate demand in the short run and positively affect productivity in the long run. Does not this sound familiar, like industrial policy, to which Summers is so opposed to. See this as well.(This is exactly what Senator Obama has been arguing for in his campaign speeches).

So there is a need to ensure that the pressure to increase spending is directed at areas where it will have the most transformational impact. We need to identify those investments that stimulate demand in the short run and have a positive impact on productivity. These include renewable energy technologies and the infrastructure to support them, the broader application of biotechnologies and expanding broadband connectivity, an area where the US has fallen behind.

All of these considerations suggest that the pendulum will swing – and should swing – towards an enhanced role for government in saving the market system from its excesses and inadequacies. Policymakers need to be attentive to potential government flaws as well. For example, they need to recognise that, even as events compel larger deficits in the short run, they reinforce the need for longer-term measures to keep government finances on a sound footing. They must also be wary of measures that have a short-term superficial appeal, yet have adverse long-term consequences.