Summers: Switch from spending to producing to fix economy

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By Patrice Hill

The Obama administration hopes to reshape the U.S. economy to be less dependent on consumer spending and debt for growth while increasing the role of manufacturing and exports, the White House's top economic adviser said in a much-anticipated speech Friday.

Appearing before the Peterson Institute for International Economics in Washington, Lawrence H. Summers, head of the White House National Economic Council, suggested the administration is using the sharply increased role that the government gained as it sought to address multiple crises unfolding when President Obama took office as an occasion to try to change the direction of the economy in the future.

The government already was playing a major role in propping up banks and the financial system when Mr. Obama took office. Since then, the president has staged a government takeover of much of the U.S. auto sector, pushed through a record stimulus program and proposed dramatically expanding government mandates in health care and energy to address chronic problems in those sectors and to curb global warming.

Mr. Summers, a widely admired economist and former Treasury secretaryunder Bill Clinton, said the overall goal of the president's agenda is to redirect economic growth into areas that benefit middle-class workers more while rewarding less the wealthy risk-takers whose activities fed the housing and credit bubbles that led to the economic crisis.

"Yes, the president has an ambitious agenda," said Mr. Summers, who is rumored to be a top candidate to possibly replace Federal Reserve Chairman Ben S. Bernanke when his term expires in January. "But it is an agenda comprised of measures that lay a foundation for future prosperity and for the confidence on which the current recovery depends."

The president was confronted with a series of crises when he entered office, but the economy is now slowly responding to the administration's efforts to revive it, he said, noting that the stimulus provisions are starting to gradually work their way through the economy.

"We were at the brink of catastrophe at the beginning of the year, but we have walked some substantial distance back from the abyss," he said. "Substantial progress has been made in rescuing the economy from the risk of economic collapse that looked all too real six months ago."

In shaping the stimulus bill and other legislative programs, the president insisted that "the recovery from this crisis would be built not on the flimsy foundation of asset bubbles but on the firm foundation of productive investment and long-term growth," he said.

The past practice of relying on consumers to generate as much as 70 percent of economic growth, often by going deeply into debt, must change, said Mr. Summers, even if that means a painful transition both for the U.S. economy and global economy, which also depends on American consumers as a major engine of growth.

Instead, Mr. Obama wants to promote growth in areas he favors, such as exports and "green energy," even if they are less proven or reliable sources of growth for the economy.

"The rebuilt American economy must be more export-oriented and less consumption-oriented, more environmentally oriented and less fossil-energy-oriented, more bio- and software-engineering-oriented and less financial-engineering-oriented, more middle-class-oriented and less oriented to income growth that disproportionately favors a very small share of the population," he said.

Mr. Summers noted that some of the shift toward exporting more and consuming less already has occurred as a result of the financial crisis and the dramatic shrinkage of the U.S. trade deficit in the past year.

U.S. consumers, hit by a sharp drop in credit, stocks and home prices that depleted the value of their biggest investments, pulled back on spending in an unprecedented way for modern times. Since a large portion of what people consumed was imported in the past, the retrenchment caused a dramatic drop in imports and the trade deficit.

The collapse in stocks and home prices at the same time forced consumers to put aside more of their income for retirement and other needs, causing the savings rate to rise to 5 percent in recent months.

Consumers also have been striving to pay down the bloated debts they built up when house prices were soaring and many tapped into their home equity to finance spending splurges.

Mr. Summers noted these adjustments are painful both for consumers and the economy.

"For quite some time, the United States will be living with the consequences of an overleveraged economy," he said. "The common desire of households, businesses and financial institutions to reduce their borrowing and improve their balance sheets will act as a drag on spending and growth. While painful, these adjustments are essential to laying a sound foundation for future growth."

The administration sees the dramatic increase in federal spending that the president and Congress have engineered as necessary to prop up the economy while consumers and businesses are mending their finances, he said.

"It is appropriate that while the private sector deleverages, government, through fiscal policies and through central-bank lending, must cushion the adjustment process by providing public support for spending," he said.

Manufactured exports emerged as an intermittent source of growth in the past year as the dollar declined. Mr. Summers' remarks suggest that the administration may seek to further boost exports by allowing the dollar to weaken further. The drop of the dollar penalizes consumers as it causes a decline in their purchasing power.