Wednesday, September 10, 2008

Lawrence Summers on Fiscal Policy During This Recession & McCain v. Obama

On Saturday, I speculated on what Lawrence Summers might say in light of the dismal employment news:

Summers strikes me as a long-term deficit hawk for the same pro-growth reasons that I am. Something to do with increasing national savings – which of course the Reagan-Bush43-McCain wing of the Republican Party seems to think has it all backwards. We deficit hawks tend to favor countercyclical monetary policy that lowers interest rates to encourage investment (and yes net exports via dollar devaluation) when aggregate demand is weak. But the Federal Reserve has played that lever and some of us are concerned that it alone will not be enough. So as the politicians want to pander to the public with promises of both more spending and tax cuts too, let’s try to figure out which set of fiscal policies can do the best job of giving timely, targeted, and effective short-term fiscal stimulus and at the same time tell Wall Street that we are serious about long-term fiscal responsibility. This policy prescription used to be called Rubinomics and I submit that it worked well for the Clinton Administration. But then Summers was one of his excellent economic advisors – to which President Clinton did listen to carefully.

Well – when Larry speaks, I often just listen:

Former U.S. Treasury Secretary Lawrence Summers Tuesday said a second fiscal stimulus program is “the right response” to the current turmoil facing the U.S. economy but the plan shouldn’t raise projected deficits beyond a year or two. “Beyond this horizon it is essential that any new spending or tax cutting be offset by measures that reduce projected deficits,” said Summers, a Harvard University professor who has advised Democratic presidential candidate Barack Obama. Testifying before the House Budget Committee at an afternoon hearing, Summers said that any new stimulus plan should be temporary and targeted and also matched by actions that make the program budget-neutral over a five- or 10-year horizon. “I believe the balance of risks suggest a compelling case for a significant fiscal stimulus program that increases the deficit in the short run” but not over the medium to longer term, he said. The program may be most beneficial if it includes new measures for food stamps, unemployment insurance and other policies aimed at supporting low-income families, said Summers. He also argued in favor of new infrastructure investment as well as changes in Medicaid reimbursement rules and new funding to help low-income residents pay their heating bills.

Like I said! But let’s see if any of the Presidential candidates are listening:

McCain wants tax cuts – lots of them. Some of them are temporary tax cuts (gasoline tax rebates) which a lot of economists would argue have little bang for the back. But McCain is also advocating making George W. Bush’s tax cuts permanent. Whoops – that’s the complete opposite of what Rubinomics would call for. It would reduce national savings and long-term economic growth and could even hurt forward looking investors types such as those folks on Wall Street. The McCain recipe is a lot like the Reagan and Bush43 recipes and the evidence is that these recipes work poorly. Obama is calling for an acceleration of public investment projects, which could give a large bang for the buck and perhaps more timely bang for the buck. But I’m not ready to say President Obama would be a repeat of what President Clinton did back in 1993. Candidate Obama wants to tell all but the very rich they get a tax cut. Then again candidate Clinton made that promise back in 1992. But at least candidate Obama is proposing less fiscal irresponsibility than candidate McCain and is willing to say some folks will have to pay more in taxes. Candidate Obama is also surrounding himself with economic advisors who are actual economists. McCain’s idea for economic advisors include Carly Fiorina and Phil Gramm.

Talk about lipstick on a pig!

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