It’s come to this in America: the most prominent champion of extending stimulus, including the payroll tax cut, is Larry Summers. And he also obliterated the argument for the confidence fairy succinctly.
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 [...]
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.
Summers’ endorsement of extending the fiscal stimulus from the payroll tax cut, which could be accomplished without even a perceived harm to the Social Security Trust Fund (just make it a refundable tax credit of 2% of salary paid out through withholding), puts him at odds with most of Washington. Both parties have endorsed letting that tax cut expire, pulling back $125 billion in fiscal accommodation and leading to a 1% reduction in GDP in 2013. But Summers wants it to stay, even without an offset. “Even if there was no explicit pay-for today, the extra income growth that would result as long as measures were taken at some point to stabilize the debt would be helpful,” he said.
Are there better ways to spend the federal Treasury than a payroll tax cut or some facsimile? Maybe. But it does amount to a wage subsidy in a time of stagnant or falling wages, and it’s fairly simple to implement. The economy is not in a state where it needs to sharply cut back on fiscal spending, nor is it in a state where it can sustain 1% slashes to GDP. We don’t yet have the job or economic growth necessary to tighten up the reins. I’m basically biased in favor of the facts of what the economy needs, and it really does need more stimulus.
By saying that it’s not enough to merely “avoid the cliff,” Summers wants to provide the exact opposite prescription for the economy as the fiscal scolds. On CNBC of all places, Steve Liesman had a great interview with the two primary scolds, Erskine Bowles and Alan Simpson, decimating their argument that we’re in a “moment of truth” on the deficit.
For example, here’s a question that almost never gets asked, but which Liesman asked today to Alan Simpson:
“Senator, it’s hard to look at a 1.6% yield on the 10-year right now to see the money that floods into the U.S. Treasury market any time there’s concern about anything in the world and say, you know what? The deficit’s the big problem right now.”
Alan Simpson was forced to follow that up with a cliche and then a falsehood…
“Well, we’re the healthiest horse in the glue factory… the trajectory of debt, deficit and interest in this country is exactly the same as the PIIGS countries. except we’re lots bigger.”
As noted, the glue factory line is just an old cliche (along with cleanest dirty shirt, etc.) and the trajectory of debt, deficits, and interest is not at all the same as in the PIIGS countries.
The payroll tax is not going to be extended, no matter how much Larry Summers protests. But this challenge to the underpinnings of deficit mania is quite welcome.