Lawrence Summers Discovers a New Meme: Contingency

How to ensure stimulus today, austerity tomorrow ... Economic forecasters divide into two groups. There are those who cannot know the future but think they can – and then there are those who recognise their inability to know the future. Major shifts in the economy are rarely forecast and often not fully recognised until they have been under way for some time. So judgments about the US economy have to be tentative. What can be said is that for the first time in five years a resumption of growth significantly above the economy's potential now appears a substantial possibility. Put differently, after years when growth was more likely to surprise below expectations than above them, the risks are now very much two-sided ... How then to respond to valid concerns about fiscal sustainability, excessive credit creation and the time it may take to return to normality in a world where policy credibility is essential? The right approach is to use contingent commitments – policies that commit to action to normalise conditions, but only when certain thresholds are crossed. – FT

Dominant Social Theme: Here is a new and complex term designed to make central planning sound alluring.

Free-Market Analysis: Lawrence Summers, one of the most important and famous economists in the United States, has written an article about something called contingent commitments. Like most strange and mysterious phrases, this one is aimed at the usual culprit: central banking.

There is one basic conversation going on currently in this era of what we call the Internet Reformation. This is the conversation over whether a handful of people should have the moral and legal right to preside over the disbursement of trillions of dollars via central banking.

It is the Internet that has made this conversation possible. Like the Gutenberg Press before it, the Internet has undermined the dominant social themes of the elite and opened them up for questioning. And questioned they have been. Here's some more from the article:

A convalescing patient who does not finish their course of treatment takes a grave risk. So too the most serious risk to recovery over the next few years is no longer financial strain or external shocks, but that policy will shift too quickly away from its emphasis on maintaining adequate demand, towards a concern with traditional fiscal and monetary prudence.

On even a pessimistic reading of the economy's potential, unemployment remains 2 percentage points below normal levels, employment remains 5m jobs below potential levels and gross domestic product remains close to $1tn short of its potential. Even if the economy creates 300,000 jobs a month and grows at 4 per cent, it would take several years to restore normal conditions. So a lurch back this year towards the kind of policies that are appropriate in normal times would be quite premature.

Indeed, recent research suggests that, by slowing investment and increasing long-term employment, such policies could seriously damage the economy's long-term performance. Brad Delong and I argued in a recent paper that premature and excessive fiscal contraction could even, by shrinking the economy, exacerbate budget problems in the long run ...

So, for example, it might be appropriate for the Federal Reserve to commit to maintain the current Fed Funds rate until some threshold with respect to unemployment or expected inflation is crossed. Commitments to fund infrastructure over many years might include a commitment that a financing mechanism such as a gasoline tax would be triggered when some level of employment or output growth has been achieved for a given interval. Tax reform legislation might propose that new rates be phased in at a pace that would depend on economic performance.

Contingent commitments have the virtue of giving households and businesses clarity as to how policy will play out. In areas where legislation is necessary, they can help to eliminate political uncertainty. They also allow policy makers to make a simultaneous commitment to near-term expansion and medium-term prudence – exactly what we require right now.

There are so many things wrong in this article it is hard to know where to begin. But we can see one area right in the excerpt above. Summers refers to the economy as a patient. This is a brilliant use of dialectic because the opposite of a patient is a doctor. Summers has the idea that the central bank is the doctor.

It always comes down to the central bank because the central bank is where the money is. The ability to print money from nothing is what funds the elites' drive toward world government, which is their evident and apparent goal.

But an economy is not a patient. This is a ludicrous and even malicious analogy. The idea that an economy is a patient presents the perspective that people are merely a supine mass waiting to be operated on.

As usual, the underlying (submerged or glaciated) dialogue lies between the poles of human action and elite control. Central banks fix prices, as do all regulations. They do so by force. There is no middle ground here. One can, of course, argue that force is necessary and just ...

But at least insist on force knowing that force inevitably transfers wealth from those who have earned it to those who haven't and often don't know how to use it adequately, or at least not effectively.

The proximate reason for Summers's article is the evident and obvious reality that the West's central banking paradigm is not working anymore. This is no surprise, of course.

It is impossible to fix prices for any length of time. Modern central banking has led to a worldwide economy that is impossibly distorted. It has created a modern banking bubble that funnels much of the West's productive income into financial products that would not have been created absent a central banking fiat money monopoly.

Conclusion: Summers wants central banks to make assurances about future actions when a threshold is reached. This a bit like asking a hereditary ruler to provide assurances about dictates. It does nothing to ameliorate the underlying dysfunction and arbitrariness of the current system itself.