Davos prescriptions for the US economy: Chrystia Freeland

Most importantly of all, when it comes to the deficit debate, Summers is a political protege of Robert E. Rubin, the Treasury secretary under President Bill Clinton whose hawkishness on the deficit was so iconic that it inspired the always quotable political maestro James Carville to muse that he wanted to be reincarnated as the bond market, because it was, in the Rubin world view, omnipotent, a characteristic to which Carville aspired.

All of which is to say that Summers is the closest the Davos set comes to the Delphic Oracle - 150 people were turned back from his event this week - and a historic deficit hawk in very good standing. That's why Summers' relatively dovish comments about US deficit reduction should carry such clout.

Summers' most important point was that economic policy is more like medical treatment than religion. It isn't a dogma that should be cleaved to under every circumstance. Instead, it is a doctor's black bag, whose particular instrument depends on the specific patient.

Viewed in that way, there is no contradiction between supporting a hawkish approach to US government spending in the 1990s and a more expansionary bias today. The world has changed, so the right policy needs to be different, too.

Here is how Summers explained it: "In 1993, here's what the situation was: Capital costs were really high, the trade deficit was really big, and if you looked at a graph of average wages and the productivity of American workers, those two graphs lay on top of each other. So, bringing down the deficit, reducing capital costs, raising investment, spurring productivity growth, was the right and natural central strategy for spurring growth. That was what Bob Rubin advised Bill Clinton, that was the advice Bill Clinton followed, and they were right."

... contd.

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