Summers sees end to ‘sense of free-fall’

Summers sees end to ‘sense of free-fall’
By Tom Braithwaite in Washington
Copyright The Financial Times Limited 2009
Published: April 9 2009 20:27 | Last updated: April 9 2009 20:27
http://www.ft.com/cms/s/0/f4f1ac1c-2537-11de-8a66-00144feabdc0.html


Lawrence Summers, chief economic adviser to the White House, said the “sense of freefall” in the US economy would end in the next few months but cautioned that the risks of deflation and more job losses had not gone away.

Acknowledging that there were still “substantial downdrafts” in the economy, Mr Summers said the government’s intervention and a natural recovery cycle were having a positive effect.

”I think the sense of a ball falling off the table - which is what the economy has felt like since the middle of last fall - I think we can be reasonably confident that that’s going to end within the next few months and you will no longer have that sense of free-fall,” he told the Economic Club of Washington on Thursday.

Mr Summers declined to estimate where unemployment would peak but noted that “even if we get a return to positive growth, an economy that was growing at 1 per cent would be an economy with rising unemployment”. The unemployment rate rose to 8.5 per cent last month, a 25-year record.

He also warned that there were “risks of both deflation and inflation” even though market expectations of a sustained and damaging period of falling prices have waned since the height of the financial crisis last year.

“I don’t think the concern about deflation in the near term is one that can be entirely discounted,” said Mr Summers.

With fiscal conservatives complaining about the scope of President Barack Obama’s budget plans, which include a far-reaching reform of health care and the introduction of a cap-and-trade system for carbon emissions, Mr Summers insisted that the measures “aren’t luxuries to be deferred at a time when we have a weak economy”.

Increased government investment would provide a stimulus effect, he said, and reforms to health care would save taxpayer money in the long run.

Mr Summers was saved from answering in full a question on whether the administration might ask Congress for a second fiscal stimulus plan when two protesters briefly interrupted the lunch and called for the economics adviser to resign.

Asked later whether the increase in the US government deficit would make it harder to sell debt to foreign nations, he noted that Treasury bond prices had been rising on days of increased market uncertainty about the global economy.

”So it’s important to remember how fortunate we are as a country to have a currency and a bond market that is seen in every way as a source of strength and it’s a huge responsibility for us to keep it that way,” he added.