Financial Times (August 13, 2013) (Letters)
From David R. Martin:
Sir, Scott Sumner has it wrong in criticising Lawrence Summers’ candidacy for the top position at the Federal Reserve (“Why Obama should not pick Summers for the Fed”, August 8). His main attack concerns Professor Summers’ support for more fiscal stimulus. Unless the author completely discounts the possibility of more fiscal stimulus due to the gridlock caused by the House of Representatives, I struggle to understand his reasoning.
Contrary to the author’s claim, fiscal stimulus is not “far too weak to prevent an economy from falling into a severe recession”. It was massive fiscal stimulus, not monetary policy, that extracted the US from the Great Depression. It was another healthy, albeit insufficient, dose of direct government spending that mitigated the harsh effects of the 2008 financial crisis.
Fiscal intervention removes guess work. Large government investments can be specifically targeted and directly create jobs.
Meanwhile, using monetary policy to lower interest rates is like spraying a fine mist on a raging fire. Loose money is not directed at any particular sectors. Further, monetary policy depends wholly on the expectation that the extra money in the market will be used by private actors to create jobs. Those with access to the increased supply of money can merely hoard it or take it offshore. As in the case of tax cuts, there is no duty and, hence, no certainty whatsoever that the beneficiaries of cheap money will actually spend or invest it in the US to create jobs.
Of course, the Federal Reserve does not have direct control over fiscal stimulus. This is the job of Congress and the president. However, the Fed chairman has an influential voice with elected officials and other policy makers. We need a strong voice that recognises the limits of monetary policy and favours the greater use of fiscal interventions to keep this nation’s capabilities at the vanguard. In this regard, Lawrence Summers fully fits the bill.
David R Martin, DR Martin LLC, Atlanta, GA, US