Most reports of Lawrence Summers’ speech last week led with his reassurance that the crisis was beginning to ease and his effort to restore confidence. It was a lot more than that.
Mr. Summers sounded like the Harvard economics professor that he still is while serving as director of President Obama’s National Economic Council. At a forum at the Brookings Institution, he told how deep the economy had fallen, explained why it crashed, outlined the strategy to fix it, said recovery could take considerable time, and expressed confidence in a bright and improved future.
The crash: Fifty trillion dollars in global wealth has vanished in 18 months, including $7 trillion from the U.S. stock market and $6 trillion in U.S. housing value. Those losses have led to declining demand and shrinking employment and gross domestic product still dropping at the most rapid rates since World War II.
The cause: a radically different sort of business cycle. Normally, he explained, the markets are self-stabilizing. If there’s an excess of wheat the price falls, farmers grow less and others consume more. When the economy slows, interest rates fall, borrowing increases, and the market speeds up. But this time, as can happen two or three times each century, this “self-equilibrating” breaks down. Vicious cycles take over. He summed up: “In the past few years, we’ve seen too much greed and too little fear; too much spending and not enough saving; too much borrowing and not enough worrying. Today, however, our problem is exactly the opposite.”
The strategy: Essentially, break the vicious cycles with a return to entrepreneurship (although not greed) and a lot less fear. A fresh trust allowing opportunity to overcome fear, so that businesses and families can again imagine a brighter future. In a word, confidence without complacency.
The promise: “We have the most productive workers in the world, the greatest universities and capacity for innovation, an incredible amount of resilience, entrepreneurship, and flexibility, and the most diverse and creative population of any major economy.”
He wound up with a declaration: “We can and will emerge more prosperous, stronger, wiser, and better prepared for the future.”
That is likely true, but breaking a cycle of fear, as President Franklin Roosevelt articulated, is a difficult task. It will take more than rhetoric for Americans to again trust that the U.S. economy is truly on the upswing. As Mr. Summers noted, there are bright spots. Many more of them will be needed before American economic fear can be turned into confidence.