Opinion

Lawrence Summers

The ‘Obama debt’ fallacy

Lawrence Summers
Nov 5, 2012 15:16 UTC

Writing on behalf of the Romney campaign, my friend Mike Boskin has responded to my column from last week that argued that in a number of areas of economic policy, President Obama has the superior vision. Boskin condemns what he refers to as “Obama debt” and argues that Governor Romney has a better plan that he asserts offers “a superior alternative of balanced budgets.” While I was not writing on behalf of the Obama campaign and my piece had a much broader focus than budget deficits, several responses are appropriate.

First, Boskin is correct in noting that current budget deficits and rates of debt accumulation cannot be maintained indefinitely, and that stabilizing and ultimately reducing the debt-to-GDP ratio is important if all sorts of economic horrors are to be avoided. This is a point of agreement between the two candidates–not a basis for choosing between them.

Second, Boskin blames the current high level of deficits on President Obama’s policies, but that is hard to square with the facts. When President Clinton left office in 2001, we were paying down the national debt at the rate of several hundred billions of dollars a year with budget surpluses. Since that time the Bush administration moved the United States substantially into budget deficits with large tax cuts, major military commitments to wars in Iraq and Afghanistan and a new prescription drug entitlement ‑ all undertaken without offsetting expenditure reduction or increasing revenue. Beyond these decisions, the largest factor in the current level of deficits is the worst economic downturn since the Depression ‑ a downturn that began under President Bush. People will debate the merits of President Obama’s stimulus measures ‑ though I think their positive effect on growth and employment is quite clear ‑ but this debate matters little. Government employment has been contracting, and the debate over stimulus has largely faded.

Third, Boskin blurs the facts on who has been constructive with respect to deficit reduction. In addressing the Simpson-Bowles plan, he neglects to mention that the plan was dead on arrival when presented in November 2010 because of the implacable opposition of House Republicans, led by Paul Ryan who voted against the plan within the commission. It has long been clear that President Obama is prepared to reach an agreement based on the underlying principles of Simpson-Bowles. But that has not been possible because Congress is unwilling to raise revenues in addition to cutting expenditures. Governor Romney seems to share this resistance, having vowed that he would not accept even $1 of revenue increases for every $10 of expenditure cuts.

Fourth, in asserting that Governor Romney has a plan to balance the budget, Boskin is blithe, to say the least. Relative to current law, Romney has committed to a 20 percent tax rate reduction that independent observers calculate as costing $5 trillion over 10 years; defense spending increases in the $2 trillion range; and preservation of President Bush’s tax cut for the top 1 percent of taxpayers that costs $1 trillion. He has said nothing about how this is to be financed other than referencing loopholes for high-income taxpayers. Unfortunately, as independent analysts have repeatedly pointed out, there are not nearly enough loopholes. Even if he closed all tax credits and deductions for high-income taxpayers, he could not offset the cost of his high-income tax cuts, let alone the cost of his entire program. And this is before any consideration of the cost of balancing the budget.

This election, Obama is the wiser economic choice

Lawrence Summers
Oct 29, 2012 11:53 UTC

Even as our politicians disagree on a great deal, most experts can agree on the objectives of economic policy. The next president will not have succeeded in the economic area unless he accomplishes three things: Reestablishing economic growth at a rate that makes real reductions in unemployment possible. Placing the nation’s finances on a stable foundation by putting in place measures to assure that U.S. sovereign debt is declining relative to America’s wealth. Renewing the economy’s foundation in a way that can support steady growth in middle-class incomes over the next generation, along with work for all who want it.

Where are the candidates on these three issues? President Obama has recognized that the inadequacy of demand is the principal barrier to growth and has sought to bolster both public- and private-sector demand since becoming president. Recent work by the IMF has confirmed the premise of his policies: namely, that at a time when short-term interest rates are at zero, fiscal policies are especially potent. The president has also respected the independence of the Federal Reserve as it has sought to respond creatively to the challenge of increasing demand even with short-term interest rates zeroed out. And he has put the economy on track to nearly doubling exports over five years through a series of measures, such as increasing government support for exporters. He has made clear his commitment to taking advantage of current low interest rates to finance public investment and protect public-sector jobs, and to continue to promote US exports.

In contrast, Governor Romney supports immediate efforts to sharply reduce government spending even as economic slack remains and Congress—at the president’s behest—has already legislated the most draconian domestic discretionary spending cuts in history. Through some set of intellectual gymnastics, Mitt Romney concludes that a government purchasing a new weapon systems or the recipient of a tax cut buying luxury goods creates jobs, but spending on fixing schools and highways does not. He also seems comfortable involving himself in monetary policy, favoring a reduction in the supply of credit relative to current Fed policy. And his insistence that he will name China a currency manipulator on his first day as president, even before his appointees have moved into their offices, surely increases uncertainty by making a trade war possible.

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