What would Larry Summers do?

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Jan 23 2009, 9:40 am by Conor Clarke

There's been a worthwhile argument between Tyler Cowen, Matt Yglesias, Paul Krugman and Greg Mankiw over the standards we should apply to the debate over the stimulus package. It's a debate I'm going to do my best to avoid.

But a related question is whether or not the stimulus package meets the standards of its own architects. And it just so happens that prior to being tapped for the NEC Larry Summers was writing a monthly column for the Financial Times. A year ago, he wrote a column advocating the use of fiscal stimulus only under certain conditions:

First, to be effective, fiscal stimulus must be timely. To be worth undertaking, it must be [...] based on changes in taxes and benefits that can be implemented almost immediately.

Second, fiscal stimulus only works if it is spent so it must be targeted. Targeting should favour those with low incomes and those whose incomes have recently fallen for whom spending is most urgent.

Third, fiscal stimulus, to be maximally effective, must be clearly and credibly temporary - with no significant adverse impact on the deficit for more than a year or so after implementation. Otherwise it risks being counterproductive by raising the spectre of enlarged future deficits pushing up longer-term interest rates and undermining confidence and longer-term growth prospects.

Temporary, targeted and timely -- that was supposed to be the fiscal policy mantra of Rubin and Summers' Hamilton Project. I think those standards are worth keeping in mind as the debate proceeds, especially since there are certainly tradeoffs between them -- e.g., the more timely the bill, the harder it is to make it targetted. Will the current stimilus meet the standards? Obama wants the stimulus on his desk by February 16. Good luck.

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Comments (1)

cubanbob January 23, 2009 1:29 PM

"First, to be effective, fiscal stimulus must be timely. To be worth undertaking, it must be [...] based on changes in taxes and benefits that can be implemented almost immediately."

That requires a tax cut for people who actually pay taxes and the cut needs to be implemented immediately.

" Second, fiscal stimulus only works if it is spent so it must be targeted. Targeting should favour those with low incomes and those whose incomes have recently fallen for whom spending is most urgent."

Typical socialist nonsense. Targeting is almost always a failure. It creates distortions. Why do we have some many bubbles? Targeted tax cuts and deductions and policy measures are a large component of bubbles. If government bureaucrats were wise enough to run a successful growing planned economy we would all be proud card carrying communists. Although not polite to say in the current PC environment, the money belongs to the net taxpayers not to the net tax consumers. I fail to see why because someone has a problem as a taxpayer it is my obligation to support them.
Again the arrogance that the government is smarter and wiser than you and should decide for you what you should spend your money on.

" Temporary, targeted and timely -- that was supposed to be the fiscal policy mantra of Rubin and Summers' Hamilton Project. I think those standards are worth keeping in mind as the debate proceeds, especially since there are certainly tradeoffs between them -- e.g., the more timely the bill, the harder it is to make it targetted. Will the current stimilus meet the standards? Obama wants the stimulus on his desk by February 16. Good luck."

A bill that will have most of its effect take place years from now is pointless in solving today's problems but instead will create more problems in the future. Again temporary tax cuts do not influence long term investment. Those who pay real taxes will most likely pay down debt and save the rest. The nickels and dimes to the new welfare class will probably have the same result;paying down debt or having a little cash in savings. Unless the government intends to create a massive labor shortage by drafting 12 million or more men like it did in WW2 (and paying very low wages to the draftees) these democrat stimulus packages will not work and have never worked. Since the current population is double that of 1945, perhaps Rangel's idea of a draft is to get 20 million or more men out of the labor force and inducing an an expansion by running the economy at nearly 100% when the draftees are excluded for the labor force.