Larry Summers
Larry Summers

Low Interest Rates Will Stick Around, Summers Says

Economist says U.S. still not where it needs it to be.

Low interest rates are poised to continue for a long time, predicts former Treasury secretary Larry Summers, noting that slack demand and continued high unemployment continues to bedevil the U.S. economy.

While the U.S. recently received a reprieve from a “grotesque” fate when Congress avoided defaulting, the potential for the U.S. economy remains unfulfilled, Summers told attendees at the UBS CIO Global Forum on Thursday.

“The good news is that even the most foolish of people, having shot themselves in the foot, rarely reload,” Summers says. “Therefore I think it is very unlikely that—exceptionally unlikely—that will see another government shutdown or another march to the break of default this winter.”

Those who pushed the U.S. toward default will probably be discouraged from a repeat performance because they failed to score political points off the strategy and elections are nearing.  But Summers was quick to point out that wasn’t any kind of important achievement.

“The grave cause for concern, in looking at the U.S. economy and in looking at the economies of the industrialized world, is that now, four years after the financial crisis was contained, four years after the recession troughed in the U.S., GDP has gained essentially no ground relative to potential GDP,” he says.

Why? The economy is constrained not by supply, but by a lack of demand, something that will continue for "the neat to medium term." 

Summers pointed out that the “inexplicable” low level of government spending and employment, poor international trade and regulatory uncertainty don't. He particularly pointed to regulation as a damper on economic growth. “There’s no question that we’re chilling potential demand activity with regulation,” he says.

This is also not a time for austerity, he said. “We’re gripped in the United States by a kind of deficit hysteria,” Summers says. But in fact, Summers notes that the Congressional Budget Office forecasts the debt-to-GDP is projected to decline for the next 10 years.

To gain that growth, Summers suggests more demand needs to come from the public and private sector by utilizing the low interest rates to fund projects such as cell towers, airport renovation and school restorations.

“Many of the principles that we have thought traditionally about in economics, the virtues of austerity, balanced budgets, savings and the like, have to be rethought for the era we live in.” 

Hide comments


  • Allowed HTML tags: <em> <strong> <blockquote> <br> <p>

Plain text

  • No HTML tags allowed.
  • Web page addresses and e-mail addresses turn into links automatically.
  • Lines and paragraphs break automatically.