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All Da King's Men

Larry Summers On The Economy

By Da King Published: August 5, 2011

Larry Summers was the Treasury Secretary under President Clinton, and the chief economic advisor to President Obama in 2009-2010. Summers resigned from the Obama administration in September 2010. I read his comments about the debt ceiling deal and the economy in general a couple days ago, and thought they would be informative. Here are Summers' remarks, with some comments from myself thrown in. My comments will be enclosed in brackets:

At last Washington has reached a deal that raises the debt limit and averts a default that would have been a national embarrassment and an economic and geopolitical catastrophe. [Agreed] The forces shaping the deal are multifaceted and so are reactions. Mine has a number of elements.

Relief. There will be no default; no economy-damaging short-run austerity; no attack on the nation’s core social protection programs or universal health care; [so you liberals can stop pretending now] and no repeat, for at least 15 months, of the recent shabby spectacle. All of this was in doubt just a few days ago. It is no small thing for the administration to have reached an agreement that does no immediate harm. And it may well be that no better agreement was achievable given the political dynamics in Congress. [Agreed]

Cynicism. Objective observers would forecast larger U.S. budget deficits in the out-years than would have been predicted a few months ago. The economic forecast has deteriorated, and it is reasonable to estimate that even a half-a-percent reduction in growth averaged over 10 years adds more than a trillion dollars to the national debt in 2021. [In other words, Obama's ten-year budget that projected $10 trillion in new debt was the OPTIMISTIC scenario. It assumed complete economy recovery and robust growth, both of which are in doubt. How scary is it when $10 trillion in new debt is the optimistic outlook ?]

Despite claims of spending reductions in the range of $1 trillion, the agreements reached so far are likely to have little impact on actual spending over the next decade. The deal confirms the very low levels of spending already negotiated for 2011 and 2012 and caps 2013 spending about where most would have expected this Congress to end up. Beyond that, outcomes are anyone’s guess — Congress votes on discretionary spending annually, and the current Congress cannot effectively constrain future actions. True, there are caps and sequester threats in the debt deal, but these are virtually certain to be reformulated in 2013; in other words, the fact remains that discretionary spending going forward will largely reflect the will of future Congresses. [which is why the Tea Partiers wanted something more concrete, like spending caps or a balanced budget amendment]

Remarkably for a matter so consequential, the deal calls for a “super-committee” that will seek to reduce the deficit by $1.2 trillion but lacks agreement on the baseline from which the $1.2 trillion is to be subtracted. Is it a baseline that includes or excludes the Bush tax cuts? Includes or excludes tax extenders and the annual fix for the alternative minimum tax?

Baseline arguments are mind-numbing but highly consequential. If a baseline assuming phaseout of the Bush tax cuts is adopted, there will be no motivation to ensure repeal of the high-income tax cuts because it will not count toward the goal. Or, to make deficit reduction easier, a baseline following current policy could be adopted. This would treat the non-extension of the Bush high-income tax cuts as a $1 trillion tax increase — but this is an unlikely outcome given the likely composition of the 12-member super-committee.

Economic anxiety. The issues pressing the United States today are much more about jobs and a growth deficit than an excessive budget deficit. [Jobs are the most important, because jobs produce revenue, which in turn reduces the deficit, but this DOESN'T hold true if the jobs are artifically and temporarily created by borrowing money, especially when the borrowing far exceeds the revenue from those temporary jobs, as happened with Obama's stimulus. All that accomplished was a temporary bump leaving us in a worse financial situation than we were previously after the funds ran out] Consider that a single bad economic statistic — the manufacturing purchasing managers survey — more than wiped out all the stock market gains from the avoidance of default and that bond yields reached new lows at the moment of maximum apparent danger on the debt limit. [yes, but that's in the rearview now. The debt deal should have been struck much earlier instead of going down to the wire]

On the current policy path, it would be surprising if growth were rapid enough to reduce unemployment even to 8.5 percent by the end of 2012. A substantial withdrawal of fiscal stimulus will occur when the payroll tax cuts expire at the end of the year. [note to liberals - tax cuts ARE stimulus, and they increase demand. Obama's payroll tax cut put an average of $1,000 into consumers pockets, according to the White House] With growth at less than 1 percent in the first half of this year, the economy is effectively at a stall and facing the prospects of shocks from a European financial crisis that is decidedly not under control, spikes in oil prices and declines in business and household confidence. [note to liberals - It's NOT the debt limit deal that threatens economic catastrophe, as you've falsely been trying to say. There are worldwide geopolitical factors, such as the ones Summers named]. The indicators suggest that the economy has at least a 1-in-3 chance of falling back into recession if nothing new is done to raise demand and spur growth.

Soon, relief will give way to alarm about the United States’ economic future. [because we're in debt up to our eyeballs, with no plans in place to get out from under it] Among all the machinations ahead, two issues stand out: First, the single largest and easiest method of deficit reduction available is the non-extension of the Bush tax cuts for upper incomes. [But that won't do anything to raise demand, Mr. Summers. It will lower demand, which you just said is key to economic recovery. But I'm fine with raising taxes on the top 2%, providing that businesses are excluded. Remember, job creation is job #1, as you also stated correctly] President Obama should make clear that he will not accept their extension on any terms. Clarity on that trillion-dollar point, along with very modest entitlement reform, will be sufficient to hit current targets for deficit reduction. [not sure what "current targets for deficit reduction" means. It sounds like political doubletalk. We need to eliminate the deficits completely, and reversing the Bush tax cuts for the top 2% won't come anywhere near to accomplishing that goal, even if the counterproductive move of raising taxes on business is included] Second, it is essential that the payroll tax cut be extended and that further measures, such as infrastructure maintenance and extension of unemployment insurance, be taken to spur demand. [Mostly agree, but weren't we supposed to address infrastructure maintenance with all those shovel-ready projects in Obama's massive stimulus ? Or was something else being shoveled there ?] There is still time to confirm Churchill’s maxim that the United States always does the right thing after exhausting all the alternatives.

On a related note, yesterday President Obama's press secretary said "the White House doesn't create jobs". He's right, and it's about time the government admitted it. The White House doesn't really create jobs. The government mostly just creates an atmosphere conducive to job creation or an atmosphere that inhibits job creation. Seeing as how jobs are most important, I vote for creating an atmosphere conducive to job creation, which means placing less governmental burdens on business to the greatest extent possible, whether those burdens be regulatory, high taxation, health care mandates, trade-oriented, or whatever. By imposing all kinds of unnecessary burdens on business, the people we end up hurting are ourselves. I don't know why those on the extreme political left have such a difficult time understanding this basic point.

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