Former
U.S. Treasury Secretary Lawrence Summers floated the idea of
continuous purchases of stocks as a potential ingredient in a recipe for
the developed world to strengthen economies struggling with subdued
growth and inflation.
Among
the proposals that deserve “serious reflection” is the purchase of a
“wider range of assets on a sustained and continuing basis," Summers
said in a lecture at a Bank of Japan conference in Tokyo Friday. "I’m
not prepared to make a policy recommendation at this point,” he told
reporters later.
Summers,
who also served as a top economic adviser to President Barack
Obama, reiterated his concerns about “secular stagnation,” where trend
economic growth rates have been reduced and neutral interest rates are
lower than historic norms. To the extent that low neutral rates are in
part the consequence of investors preferring fixed-income assets and
steering clear of riskier options, policy makers can combat that by
buying risk assets, he said.
Japan
has “engaged in that type of transaction to much greater extent than
other countries,” Summers said, pointing out among its initiatives the
BOJ’s purchases of exchange-traded funds. “It is something that economic
logic suggests should be considered in other places where the zero
lower bound is a potentially important monetary policy issue,” he said,
referring to the perceived lower limit for benchmark rates set by
central banks.
Political Questions
“There
are obviously important political and economic questions associated
with government ownership of companies,” Summers noted. Some critics
could term such a policy as “socialism,” he said, while others could
highlight that governments already buy stocks in other ways, such as in
the U.S. for federal employee pension funds.
The
president emeritus of Harvard University also argued that the most
important dynamic holding down long term inflation-adjusted interest
rates is that technological advances mean that $1 of saving buys more
effective capital than ever before. He noted that Google and Apple
Inc. struggle to figure out what to do with their surfeit of cash.
Excess Cash
“In
a world where cutting-edge technology companies are awash with excess
cash, it can hardly be a surprise that there is substantial downwards
pressure on the level of real interest rates,” Summers said. Low neutral
rates will be around “for a long time to come,” requiring policy makers
to think more dynamically, he said.
As for the measures taken by central banks so far, the economist said “we are fairly near the end of the rope.”
“Perhaps
there is scope to reduce short-term interest rates a little bit more
and to make them a little bit more negative,” he said. “But there is not
much scope.”Summers reiterated his endorsement of central banks adopting a target for nominal gross domestic product ,
rather than inflation. That would offer greater flexibility to let
price levels rise to compensate for years of sub-par performance, he
said.
He urged greater monetary-fiscal coordination, and said the BOJ’s adoption of yield-curve targeting
is potentially constructive. Successful targeting “operates in a
positive way with respect to the government’s budget constraint, and
therefore should enable more expansionary fiscal policies.”
The
other key area for policy innovation lies in finding ways to boost the
neutral interest rate. Summers listed three categories:
- Higher fiscal spending
- Reduced barriers to public investment
- Measures to promote consumer spending, such as enhanced public pension benefits that would reduce consumers’ need to save
He
argued against structural reforms, such as concerted labor-market
deregulation, saying that this would serve to promote saving, by
generating less certainty for workers.
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