The US economy could grow at or above President Trump’s goal of 3% this year. And White House economists predict it’ll be that way indefinitely.
Former Treasury Secretary Larry Summers sees it differently.
“Yes, we are growing at a reasonably rapid rate, but it’s taking unsustainable fiscal deficits to drive us to that point,” Summers told Yahoo Finance at the Milken Institute Global Conference in Los Angeles. “It’s taking unsustainable increases in credit to drive us to that point. It’s taking unsustainable increases in asset prices. You can always generate a sugar high. The real problem for us is not achieving growth, but achieving sustained, healthy growth with a financial environment that’s sustainable.”
In 2013, Summers laid out a “secular stagnation” hypothesis, arguing that economic growth would remain chronically low for a variety of factors. For the second term of the Barack Obama’s presidency, that seemed to be true—annual growth rates averaged just 2.2%, well below historical norms for a recovery period.
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The economy could break out of that depressed range this year, but Summers doubts it will last. “I am sticking with the secular stagnation theory,” he says. “Sooner or later, we’re going to hit the wall.”
The problem then will be how much policymakers are able to do about it.
The Federal Reserve is normally the first emergency responder in an economic downturn, cutting interst rates to stimulate credit and spending. Monetary easing during a recession typically involves interest rate cuts of 5 percentage points, or so. But short term rates are only around 1.75% right now, which take a lot more interest rate hikes just for the Fed to reload.
“What we don’t have is what we’ve always had in the past, which is plenty of room for the Fed to cut rates,” Summer says. “Depending on when it happens, it’s very unlikely that there’s going to be room for the Fed to cut rates by anything like the 500 basis points that’s usually been necessary to restore prosperity. That’s why I’m uneasy that we have a more brittle economy than most people recognize.”
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Rick Newman is the author of four books, including Rebounders: How Winners Pivot from Setback to Success. Follow him on Twitter: @rickjnewman