Larry Summers: Deficit reduction isn’t enough to drive growth

October 11, 2012

Avoiding the fiscal cliff will prevent the U.S. economy from falling backwards into a recession. But it won't be enough to propel us forward into growth, according to Larry Summers, former economic adviser to President Obama.


Larry Summers, former economic adviser to President Obama. (Brendan Smialowski/Bloomberg)

The current debate over the fiscal cliff suggests that legislators are hoping to replace the year-end contraction with a deficit-reduction package that would be enacted in the long term. But Summers suggested that even if they succeed in doing so, it wouldn't be enough to jump start business investment and job-growth necessary for the United States to truly recover. "The idea that somehow announcing that something's going to be different about Social Security and Medicare 20 years from now is going to suddenly spur people into a renaissance of investment is unlikely," Summers said. 

Why not? In the past, Summers explained, the economic upside of fiscal consolidation was that it helped drive down interest rates, spurring growth, as during the Clinton years. Right now, however, interest rates are already at historic lows, and driving them down any further won't make much of a difference, concluded Summers, who served as Treasury secretary under President Clinton. So while it's urgently necessary to prevent the sharp, sudden fiscal contraction at the end of the year, that won't be enough to pull the economy out of the doldrums, Summers said. 

Instead, Summers proposed a host of measures that he believes are necessary in addition to avoiding the fiscal cliff: Investment in public infrastructure, a sweeping all-of-the-above energy plan, export-driven trade, comprehensive tax reform and an extension of the payroll tax cut. Doing so will not only stimulate growth in the short-term, but also prevent the long-term harm of "squandering human capital" through idle workers.

In fact, both Romney and Obama have proposed some of what Summers has recommended: Romney wants to expand domestic energy production, work out trade agreements and cut the corporate tax rate; Obama wants to increase infrastructure spending and push new small business tax cuts.

But as my colleague Lori Montgomery explains, Summers' push for an extension of the payroll tax cut is at odds with both the White House and both parties in Congress. And it's unclear whether the focus on jobs and growth will have much of a place at the negotiating table as the Dec. 31 deadline approaches. 

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Brad Plumer | October 11, 2012