Larry Summers: Shaping the Next Economic Expansion

This is a recent talk by Larry Summers, National Economic Council Chair. There is not a whole lot of new information but tells you where the administration is in terms of thought process.

He is mulling about what would be the source of growth. He talks about three things - energy, internet, and health. Having spent many years in the Internet space, it is not clear to me what substantial gain Internet investment in new bandwidth can bring. It is not clear that increased bandwidth is necessary or sufficient for creation of new value. I can see new value being created in mobility. If the mobile carriers free up handsets and applications, I can see lots of new applications being built. Healthcare is a harder problem. The current approach which involves backroom no-pain deals with HMOs and PHARMA is pretty much status quo or worse. The incentives are pretty much the same as before (Hear these great reports from the trenches in This American Life - More is Less Somebody Else's Money. They tell you why the health care reform may be non-trivial). That leaves energy and environment. There are major challenges in energy including the fact that the politics is broken and the product cannot be easily measured in many cases. He talks about the need to reduce uncertainty. A floor on the carbon or gas price will be necessary for anybody to consider investing.

“Shaping the Next Economic Expansion”
Lawrence H. Summers
New York Economic Club
October 29, 2009

How, then, to think about economic recovery that is not driven by unsustainable consumer borrowing and spending or by the public sector?

By the logic of national income accounting, it depends on three things. It depends on private sector investment, it depends on exports, and it depends on income growth that can support consumer spending increases. Let me say a little bit about each of those three things.
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Given that capacity utilization is at very low levels, it is inevitable that private investment will lag for some time to come in some parts of the economy. But in a variety of other spheres, private investment will be profoundly important for the next economic expansion. That is why the President has emphasized measures that support the availability of credit for small businesses. That is why the public sector is playing a crucial role during this period in the financing of new houses.
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Two cutting-edge sectors for the American economy at this juncture are, first, energy and the environment and, second, information technology.

We are currently working with Congress on major cap-and-trade and energy legislation to build on the substantial steps contained in the Recovery Act to support both energy efficiency and renewable energy as well as more efficient and effective exploitation of our traditional energy resources.

Turning over the capital stock more rapidly to meet environmental and energy independence objectives can be a significant contributor to aggregate demand in the short and medium term, even in the presence of significant unused capacity.

Certainty as to the likely price tag for energy can also be a spur to investment. It has been demonstrated again and again that the greatest barrier to long-term investment decisions is residual uncertainty. If we are able to resolve uncertainties in the investment area, there is substantial scope for increased demand in this key sector.