Summers suggests more stimulus

A former Obama administration economic adviser called on Monday for expanded payroll tax cuts for workers and businesses as well as infrastructure investment to accelerate economic growth and establish a sustained recovery.

In a Reuters blog post, Larry Summers, a Harvard professor, former economic adviser to President Obama and former Treasury secretary under President Bill Clinton, wrote that “substantial withdrawal of fiscal support for demand at the end of 2011 would be premature.”

{mosads}”Fiscal support should be continued and indeed expanded by providing the payroll tax cut to employers as well as employees,” he said. 

He suggested raising the share of the payroll tax cut from 2 percent to 3 percent at a near-term cost of more than $200 billion and moving ahead on infrastructure investment to “take advantage of the moment when 10-year interest rates are below 3 percent” in an effort to lower construction unemployment that stands at about 20 percent.

“These measures offer the prospect of significant improvement in economic performance over the next few years translating into significant increases in the tax base and reductions in necessary government outlays,” he wrote. 

“It is far too soon for financial policy to shift towards preventing future bubbles and possible inflation and away from assuring adequate demand.” 

Summers was a chief architect of the $787 billion stimulus signed into law by Obama in 2009. The administration has argued the bill prevented a deeper recession, but Republicans charge it was a waste of taxpayer dollars that did little to stop a rise in unemployment. 

Although the economy has added jobs and shown improvement since the recession ended a year ago, expansion is happening at a slower pace than what economists say is needed to avoid stagnation or go into a second downturn in less than five years. 

The White House and congressional leaders now are trying to hammer out a debt-reduction deal that would allow a vote on raising the nation’s $14.3 trillion debt limit by an Aug. 2 deadline set by the Treasury Department. Given this debate, the emphasis from congressional Republicans and the White House has been on reducing spending, not increasing it.

However, a May unemployment report that showed the economy added only 54,000 jobs last month has sparked calls from some House and Senate Democrats for more spending to stimulate economic growth.  

“This is no time for fatalism or for traditional political agendas that the two parties have pushed in more normal times,” Summers wrote. 

“The central irony of financial crisis is that while it is caused by too much confidence, borrowing and lending, and spending it is only resolved by increases in confidence, borrowing and lending, and spending” he said. 

He said policies should be focused around increasing all four of those components and until that happens other efforts will be “futile” at best. 

In fact, certain policies that might work well to create jobs in a healthier economy can backfire and “may actually reduce the number of people working as the level of total output remains demand constrained” if “they do not also translate into increased demand.”

Summers said the United States might have faced a double-dip recession if the White House and Congress hadn’t reached an agreement on extending tax breaks for two years and unemployment benefits through the end of 2011.