Economist urges US expansionary fiscal policy

Nobel Prize laureate economist Robert Solow on Wednesday urged the US government to adopt expansionary fiscal moves to bolster demand and economic growth.

“The U.S. economy has still not recovered from the recession, and we will not recover until there is a substantial increase in the demand for goods and services,” the renowned U.S. economist told Xinhua in an exclusive interview.

“If that has to happen naturally, it could take three, four or five years,” Solow noted.

“We are looking for some assistance from the public policy, and unfortunately what we are getting in this country is exactly the reverse,” he stressed.

The movement for austerity and immediate budget balance is moving in the “wrong direction” and counter-productive, Solow said.

“This has made the recovery more difficult rather than easier. The same thing may happen in Europe,” he said on the sidelines of a launch event for the book “Europe’s Economic Crisis.”

The U.S. federal government’s deficit stood at nearly 1.3 trillion U.S. dollars for the 2011 fiscal year due to slow revenue growth and surging entitlement outlays, indicating three years in a row that the nation’s fiscal imbalance topping the 1-trillion-dollar mark.

Republican lawmakers have urged the Obama administration to slash government spending in the immediate term.

“The U.S. Federal Reserve should do a little more, but I do not think it can do very much more. The Fed is doing the right thing, but it has done most what it can do,” noted Solow, adding that the United States and the euro zone should use more fiscal firepower to shore up economic growth.

Trillions of dollars of household wealth has gone up in smoke during the financial crisis, and the enormous loss of securities and housing values are weighing on the private sector demand and consumption, he said.

“The natural reaction of U.S. households is to try to rebuild the wealth, and to do that by spending less and saving more,” he stressed, adding that the deleveraging process will work itself out at a very slow pace.

U.S. combined household wealth continued to drop by about 0.3 percent in the second quarter this year, triggered by stock and home value decline, U.S. Federal Reserve figures showed.

Although current U.S. business investment spending is more robust than household spending growth, big U.S. companies are sitting on tons of cash as they don’t see many good investment opportunities, Solow said.

The U.S. economy will continue to improve slowly in coming years, but Europe is confronted with a real danger of slipping back into a recession largely due to a lack of unified policies, he cautioned.

It takes time for the eurozone financial turmoil to dissipate, while both the United States and European nations should make efforts to “preserve the innovation potential” of their societies and push forward “systemic innovation” to create long-term drivers for capital formation and economic growth, stressed Solow.