Summers: Economy Hasn't Grown in 'Financially Sustainable Way' for Years

Friday, 08 Aug 2014 10:43 AM

By Dan Weil

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The U.S. economy has suffered major flaws that date back even prior to the 2007-09 recession, says Larry Summers, former economic adviser to President Obama.

"It has been a long time since the American economy has grown rapidly in a financially sustainable way," the Harvard professor told New Republic magazine.

That begs the question of why lower interest rates haven't been able to boost the economy — why savings exceeds investment.

Editor’s Note:
New Warning - Stocks on Verge of Major Collapse

"There's a tendency towards increased saving because of greater wealth inequality and a rising share of profits increased the share of income going to those with high savings propensities [and] because increased uncertainty and greater indebtedness encouraged savings to repair balance sheets," Summers said.

As for investment, "you have a tendency for substantial reductions in the price of capital goods, particularly those associated with information technology," he added.

"You have a change [lowering] in the capital requirements for starting a business. . . . That operates to reduce investment."

Meanwhile, New York Times columnist Neil Irwin says economic output is $800 billion a year lower than it would be if the economy was cranking on all cylinders. He cites five sectors that are limiting the expansion.
  • Housing is the biggest detractor, accounting for $239 billion of the GDP gap.
  • Decreased spending by state and local governments accounts for $189 billion of the GDP shortfall.
  • Durable goods consumption accounts for $178 billion.
  • Weak business equipment investment accounts for $120 billion.
  • Reduced federal government spending accounts for $118 billion.
"What you want to see is that even if one segment, say housing, shrinks in importance, something else rises to take its place," Irwin noted. "And what has happened in the last few years is that each of these major segments has shrunk relative to its usual role in the economy, and nothing else has increased enough to pick up the slack."

Editor’s Note: New Warning - Stocks on Verge of Major Collapse

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